Investments and millennials aren’t exactly a match made in heaven, but who says they can’t be?
There’s a lot of heated debate taking place around housing affordability at the moment, and with the federal election drawing closer, it’s got both sides of the argument getting pretty fierce.
Unfortunately, it’s left many of us wondering if the issue will ever be addressed, or if it’s even worth trying to get a foot on that property ladder. Perhaps a life of perpetual renting is just something we’ll have to get used to.
To get a realistic idea of our options, I spoke to Ben Nash, the director of financial advice firm Pivot. When asked whether a 20 percent deposit for a home was realistic for young Australians, he agreed it isn’t easy.
“I think with current property prices in Australia, saving a 20 percent deposit is a massive challenge,” he said.
“Those looking to get into the market need to have a really good cashflow management system and strategy to make this happen.”
Ben says it’s important to note that there are other options for getting into the market. Some lenders will accept a 5 percent deposit, but will likely charge extra loan fees, something that should be offset by growing property values.
“often the extra costs can, in many cases, be offset or surpassed by the increase in the property value over time.
If it means the difference between being able to buy property sooner with a 5% deposit and paying some additional costs, or waiting a much longer period, in many cases the first option may be something worth seriously considering.”
If time is a real issue for you, it is possible to get into the market without a deposit by “using a family pledge/guarantee or under a guarantor type setup.” This is where the equity of another property is used as security for borrowing.
Not everyone will be able to leverage their parent’s property, but Ben says it’s a great and easy way to get ahead faster, as well as allowing buyers to hold savings as a safety buffer for the unexpected.
“I’ve seen this used successfully with many young people to get them into the market without having to wait for an extended period saving a deposit,” he says.
Of course, property isn’t the be-all and end-all of the investment game. There are plenty of other ways to make money with money. I asked Ben if there are any better alternatives.
“Investing in shares/stocks and other investments like managed funds can be a great way to build wealth. So long as you select the right investments and either know how to review and monitor performance (or get good professional help).”
He says using gearing strategies to get ahead is a great way to boost investments.
“However, the advantage property has over these sort of investments is the ability to use gearing strategies (gearing is simply borrowing money and then investing that money) which is the most common way property is purchased in Australia.”
The biggest advantage of gearing, Ben says, is the ability to use a small amount of money to buy a much bigger asset. He goes on to explain a little about how this works.
“Consider this example; you have $50,000 you wish to invest. In the first scenario you use this money to invest into a share portfolio which returns, on average, 5 percent each year over the longer term. The annual return on this investment is $2,500.
In the second scenario, you use the $50,000 as a deposit to purchase a property worth $500,0000, again, generating a return of 5 percent each year over the long term. The annual return on this investment, in comparison, is $25,000, ten times the return on the original investment!
Of course this is an extremely simplified scenario, so the actual result achieved would depend on your situation and the investment chosen, and does not consider costs (such as borrowing costs) required to support the borrowings on your property purchase. But you can see from the significant difference in returns that there is a lot of room to in the property example to fund extra costs and still be much better off.“
At the end of the day, property continues to be the winner for investment, and there are ways for millennials to get in on the party, but it certainly isn’t an easy slog. Ben’s advice?
“When it comes to property you firstly need to get clear on the basics, and how you can use the rules to your advantage. Then, understand your options and know how you can manage risk in your strategy to make everything run as smoothly as possible.
Once you understand your options, you should build your plan, making sure you consider what is going to be the absolute best strategy for you. Then you just need to set yourself up to make it easy to follow your plan. If you don’t have the knowledge, time, or inclination to do this yourself, consider engaging a professional adviser to help.”