Oct 20, 2016
An alternative to the 'Mum & Dad Bank'
If you're a young home buyer without the all-important deposit, you don’t have to take much notice of Treasury Secretary John Fraser’s recent comment about relying on your ‘Mum & Dad Bank'.
A good way to bridge the ‘deposit gap’ is to become a ‘rentvestor’ – live in rented accommodation and buy a modest investment property. The capital gain and rent income, combined with some solid saving, can help you to reach the point where you can afford the deposit on your own home.
If you can't afford to buy an investment property in Sydney, look elsewhere. Brisbane prices are about half of Sydney’s, and Newcastle has all the growth drivers of a capital city without the high price tag.
The deposit to buy these properties is within reach of people on average incomes if you go without a few luxuries in the meantime. And loan repayments and maintenance expenses on an investment property are deductable from the taxable rent income, which of course isn’t an option with your own home.
I got into the property market by renting a unit in a low-income suburb while I saved for the deposit my first investment property.
The ‘rentvestor’ strategy can also free you from pressuring your parents to use their life savings or superannuation for a deposit on your home. Putting the hard word on Mum and Dad to compromise their retirement savings can affect family relationships later on. That’s something to avoid at all costs.
Here are some tips to help young buyers to save for their first deposit:
- Know your expenses
The first step is to know how much you’re spending. For one month, keep a record of every dollar you spend. Apportion annual or quarterly expenses like insurance, car registration and servicing. Then sort them into two columns: ‘Essential’, such as work travel, groceries, rent, etc.; and ‘Non-Essential’, like fast food, entertainment, holiday travel, apps and electronic gadgets.
When you add up the totals you might be amazed how much you spend on things that aren’t as important as saving for your home deposit!
- Create a budget
Budgeting is crucial to saving – and it isn’t rocket science!
First, add to your monthly ‘Essential’ total a reasonable amount to cover unexpected ‘rainy day’ expenses, such as car repairs and rent increases. Then deduct the result from your monthly income, and the result is your monthly net income.
- Make saving part of your plan
The more of your monthly net income you put towards saving for a deposit on a property, the quicker you’ll get there! But if your monthly net income is very small or negative, then you need to find ways to reduce your expenses or increase your income.
- Have some savings goals
Saving money is like keeping your weight under control – some people find it easy, while others find it extremely difficult! If you’re in the latter group, then try setting some goals for the next 12 months, three years, five years, etc. They could be a house deposit, renovations on your existing house, your children’s education, a new car or a dream holiday.
Work out how much you need for each goal (allow for inflation with medium and long-term ones), including an extra ‘buffer’ amount in case there are unexpected major expenses or you’re between jobs.
- Set your priorities
When it comes to what’s important, everyone has their own priorities. Decide what yours are, and then work towards achieving them.