Why first-timers are choosing to invest rather than buy

Wednesday, 4th Jun 2014

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There is always a lot of media coverage devoted to highlighting the struggles of first-home buyers.

But while some aspiring home owners complain about rising property values and dwindling government assistance, others are taking the bull by the horns and turning conventional thinking on its head.

Rather than trying to buy their first home, many young Australians are wisely choosing to become landlords, while either renting with friends or living with their parents. This goes against what we are regularly told is ‘the normal’ way of doing things.

Why this strategy makes a lot of sense

This strategy clearly works on a number of levels. Firstly, it allows the individuals to get a foot in the door of the property market in a much more affordable manner. This is because rental income and tax benefits can go a long way toward paying the mortgage.

It also allows this lifestyle-conscious demographic to live where they want, even when they can’t afford to buy there, while also providing the flexibility to travel on a whim.

In the long term, the goal for these innovative first-timers is to use rising equity to either expand their property portfolio or get into their dream home sooner.

Interestingly, buyers can still later qualify for the first-home owner’s grant, even if they own several investment properties.

A common trap for first-time investors

The biggest mistake made by first-timers is to invest in the same type of property that first-home buyers are typically buying – namely house and land packages on the outskirts of the city.

This type of property often has a low proportion of value in the land and is located in areas with abundant future supply. This result is that these properties just don’t perform in terms of capital growth.

Investors should always choose ‘investment-grade’ properties, which are more likely to be older and in well-established suburbs.