The median house price in Australia today is now $900,000.
Depending on the deposit required, when you factor in stamp duty and other costs, you’re going to have to save somewhere between $135,000 and $240,000 just to buy at the middle of the market.
Those numbers become even bigger in cities like Melbourne and Sydney where the median house price is $1 million and $1.4 million respectively.
Saving a deposit is the single biggest hurdle that homeowners face when it comes to buying a home and it’s not limited to first home buyers.
According to the Australian Bureau of Statistics, the average household income is $122,148 a year.
Households tend to be able to save between 10 per cent and 30 per cent of their incomes. That’s somewhere between $12,000 and $36,000 per year.
At best, that would mean it takes a household four years to save a deposit to buy a house.
The reality is it’s more likely to take them between five and 10 years, because house prices grow faster than wages and savings.
The median house price has increased by an average of 7 per cent a year for the past 50 years. A 7 per cent increase to the median house price today would be $63,000; circa double what a household could save in a year.
Interestingly, a two-man team – one an entrepreneur and the other a data scientist – are out there seeking to create the solution to this saving problem that many homebuyers are facing.
The business is called ‘FrontYa’ and the company’s pitch is they help you “own now, live now, pay later” by “co-investing with property buyers to help them double their deposit.”
How does it work?
FrontYa will double your deposit by investing anywhere from $50,000 to $250,000. In exchange, they take 25 per cent of the profit (i.e. the increase in the property value). You have to sell or refinance the property within six years in order to pay them back.
No doubt there is some fine print to be considered, but as a concept I love it. Unlike the Commonwealth Bank-backed OwnHome, this model allows you to own the home from day one and is transparent. If you profit, they profit.
Having said that, I think there’s an even better solution to the great deposit challenge, and it’s sitting right under our noses.
The Baby Boomer generation is the wealthiest generation we have ever had in Australia; they’re expected to leave as much as $3.5 trillion in wealth to their Generation X and Millennial beneficiaries.
A lot of their wealth is tied up in housing and cash, both of which present an opportunity for the generations to buddy up and work together.
Cash in the bank today earns you 3 per cent if you’re lucky. Money in an offset account is lucky to save you 2 per cent. Equity in your home sits there earning nothing.
What younger people bring to the table is an income, the energy to chase opportunities and an ability to borrow money.
I’m sure there is a way that the older generation can partner with the younger generation to get a better return on their money. This then helps the younger generation who are missing the cash and assets to get started.
In Bulletproof Investing I wrote about the help I got from my Uncle John when buying my first home.
John was my version of FrontYa, lending me the majority of the deposit for my first home, in exchange for 25 per cent of the increase in the property’s value (he lent me more than half the deposit, but he is family after all!).
My contribution was taking out the loan and getting the first homeowners grant and stamp duty concession. Those two separate government incentives amounted to a not insignificant $23,000 ‘contribution’ on my part.
It was a great lesson that John taught me as a mentor. It was also a lesson in asking for help if you need it. There is no shame in asking and, in my experience, the older and more experienced generation are usually open to helping the next generation get a start in life.
John even insisted on us signing a formal contract which I think is a good idea regardless of how close you are to the person that helps you out.
Two years after I purchased my first home, the property increased in value, and I was able to refinance the loan and pay John back his initial $30,000 investment plus $10,000 in profit.
It was great outcome for John who managed to get a 33 per cent return on his investment in two years (much better than you’d get on cash in the bank). It was an even better outcome for me because I owned a home and had built up some equity without having to put in any money!
If you’re unsure how to raise the subject with someone who might be able to help you, bring up the FrontYa website as a conversation starter and offer to give them the same deal that FrontYa is offering.
If you’re fortunate enough to have family and friends who choose to help you out free of charge, then that’s great. Either way you’ll have much more success if you go in with the mindset of expecting a fair and commercial deal.
Half of something is better than all of nothing, after all.
Inheritance advice.
Q – What advice would you give someone who is young and has a large inheritance but low paying job. Is it still possible to buy property? What would be the best strategy or route to becoming a successful investor over time.
A – I am sorry to hear of your loss and hope you’re holding up ok.
Good on you for seeking to have a plan and strategy for your inheritance. There is no one size fits all, so the answer to the first part of your question will vary slightly depending on the size of the inheritance and your income. If you don’t have enough cash to buy the property outright, you’re going to need an income of $50,000 minimum to borrow from the bank (depending on your living situation, expenses, etc).
However, if you’ve got a low income, you’re going to be best off putting a big deposit down (maybe even buying in cash) and getting a property that is going to be as cash flow positive as possible. That’s going to be something in an area with a fast-growing population and giving you a 4 per cent or 5 per cent rental yield.
When it comes to becoming a successful investor, you want to buy land in an urban area with a growing population, make sure there is a house on that land that can give you a positive cash flow, and hold the property for as long as you can.
As the property increases over time, try to repeat the process over and over again.
In time, you will become wealthy and give yourself a healthy passive income.
It also helps to have the guidance of an experienced mentor who has done it.
Or you could read my book it’s all in there.
James Fitzgerald
Author, BULLETPROOF INVESTING
