Home Ownership

There are many factors that affect the decision to own versus rent. 

If you think it is a matter of finding a place you like, plonking down a huge amount of cash, and living happily ever after, then you are NOT READY to be a homeowner.  Not yet, anyway.

The purpose of this article is to get you ready to be successful in owning property, starting small and building up your value. 

In our experience, a person should consider the following, to reduce the risks and maximise your long-term benefits:

UNDERSTANDING

The most important thing is to understand the basic ideas that lead to successful ownership, including:

• housing types
  • detached house:  largest land, most expensive to buy but also often in peak demand when selling
  • attached units: moderate land, like house but common wall which is more affordable than house but similar growth when selling
  • two-storey townhouse: small bit of land, usually feels more solid/independent than apartment
  • apartment: no land, so cheaper to buy but also may fetch lower price when selling
• buying a building: there are two separate parts to a property purchase: land and buildings, each with different ways they add value
  • land: land value is what varies the most, as premium areas are more in-demand, therefore more costly (why rural properties cost less than near CBD ones)
  • buildings: similar buildings have about the same value, regardless of where they are.  Ones with more valued features. like large, modern kitchens, more bed/bath rooms 
• mortgage: a loan for the difference between the buying price (including buying costs) and the cash you can pay at settlement
  • principal: the dollars that go to the repayment of your property, reducing your balance owed, eventually to zero (when you own it 'free-and-clear')
  • interest: the (incredibly high) dollars that go to the lender as an incentive for them to loan you that incredible amount of money to 'buy' your property (you only own it once the loan is 100% paid off)
• credit rating: an industry-wide measure of how much risk you are to the lender, based on many factors in your recent (5+ years) financial history
  
  
• managing money: Nobody starts out with a big wad of cash; they build it over time, with smart choices, hard work, knowledge and patience
  • budget: this is simply a plan for how you will meet ALL your financial needs.  
  • records: recording what you actually spend is critical to knowing if your budget works for you
  • control: things change all the time, with pay raises, unexpected costs, changes in circumstance, so comparing actual expenses over time and making adjustments to your budget allow you to do better
• legal risks: de facto partnerships and marriage can create some risk of 50% loss of total shared value at breakup, as can children, shared assets, bankruptcy, missed payments
  
  
• equity and appreciation:
  • Equity: Although you can live better in a rental, your 'rent' goes back into a special account that you get much of back when you sell.
  • Appreciation:  After a time (5+ years), your property will generally be worth more than it was valued at when you bought it, due to inflation and market demand for your type of property.
• selling and upgrading: the best way to success in owning property is to start small, with a cheap house in a good area, improve it while the value goes up, then sell it, adding to your next property's value. After repeating this cycle of buy-increase-sell higher, you can comfortably afford your 'dream home' eventually.  The trick is to NOT lose a house due to not being able to afford it.  That is financial disaster.

SKILLS & HABITS

Now that we understand the things that enable successful ownership, we need to have the skills (and develop the ongoing habits) that turn ideas into value, such as:

• financial budget
• recording all expenses (to compare to budget and adjust to keep it realistic)
• living within your means
• temporarily reducing costs (while value/income increase to compensate)
• when paying for anything, ask yourself 'is this going to help me reach my goal faster/better?'

FINANCIAL HEALTH

 Having mastered the understanding and skills required to succeed, it is time to apply them and build a solid value in your name.

• open a bank account that has high interest (3-5%, if possible) for longer-term, which cannot be withdrawn from easily or too soon.  This will become your deposit, so we call it the 'My Future' account
• save a portion (generally 5-10%) of your post-tax income of every paycheck in a savings account
• when you get lump-sum amounts (i.e. tax refunds, lottery winnings, etc) put most (at least 75% into the same account)
• periodically (annually?), review your current 'My Future' balance (so you can see your goal getting closer), credit score, and mortgage rates for your level of creditworthiness
• have at least a trusted financial advisor (that you can afford) review with you at least every second year, to be sure you are working toward the best outcome, with the least cost/time/effort.

CREDIT RATING

As virtually nobody plops down the full price of a property, getting a loan for the balance is needed. Borrowing hundreds of thousands of dollars for up to 30 years comes at a cost, of course (and more than one would think!)

That's why it must be at a low interest rate, so your profits (from payments, inflation, and market conditions) go into your pocket rather than the bank's. To do this, you need to:

• have a proven history of paying all bills on time (several years, so start now!)
• use credit cards to your benefit by paying them off at the end of every month with the cash you would have used to pay for things at the time of purchase
• increasing income steadily, and staying with each job at least 3-5 years
• review your actual credit documents, addressing anything that lowers your points score (increasing your interest rate, due to being a higher risk)

IN REVIEW

There are a lot of interdependent processes involved in buying a your first property, but always remember the objective, which is to increase your future stability, independence, and wealth.  We do this by:

1. understanding how this industry works
2. leveraging what you do in the next few years to maximise what you have, and
3. actively monitoring and adjusting to ensure you are on track to achieve your goal

Although it certainly can be overwhelming to learn and do all these things, you don't have to do them alone.  We recommend creating partnerships with experts in personal finance, banking, financial planning, legal protections, housing mortgages, and building repair/renovation.   Yes, they cost, but not as much as a poor 'guess' made trying to become proficient in something new.  It also takes less time, is less stress, and less likely to 'fall into a heap' when you need it to work cleanly.

Also see:

Sample Budget   •   Mortgage Estimator   •   Property Search (US/AUS)   •   Preparation