How do young people start investing

[Bricks & Mortar]

People who have their PPOR usually have equity to finance their first IP but
I was wondering how much savings/deposit was enough for the younger people (20's) to purchase their first IP.

Would they choose a PPOR first (to get the FOHG)?
Buy in a hybrid trust stucture to still enable the FOHG?
Just buy an IP with advance or a loan from the parents?


We know it is hard it is to start off, but what additional difficulties do the younger generations face, and what pitfalls can be avoided?
Is keeping focus on saving an issue?

cheers Timm

 

[Ol School Skata]

If you were to buy an IP in your own name, i believe you can still claim the FHOG when you do buy your own PPOR. Obviously there conditions on this but if you check with the Office of State Revenue in your state, they will be able to help you with this.

My experience in buying my first IP was i had 10% deposit and all additional costs involved in purchasing. I could show the bank i had a savings record and i could afford this property in times of trouble.

I wish i had taken up several people's advice of have a developed plan before you invest - dont invest with no clear strategy. Make sure you know where this IP fits into your strategy.

 

[Mr. Fabulous]

Hi Timm,

I went to the good old fashioned saving my own way route. Got side tracked with a few other investments on the way though. If I hadn't made those choices, I would have my first IP by now. But I feel I have made the right decision and am still very clearly set on my goals. I'm very much in the 'broad base of investments camp' rather than the 'keep the blinders on and invest only in IP's camp'.

My parents have been ahhh.... 'reluctant' to help me out financialy in the past, which is okay - when I achieve my goals I know I am able to say 'I did it myself' and appreciate the goal so much more.

General pitfalls can be - friends (ie: mates going oout a lot, very tempting to join them), relatively low income when just starting work, the costs of continuously moving while renting can hurt (although not really a major issue), constant bombardment of consumerist products aimed directly at this market. It's not easy, but it's definitely worth it.

Mark

 

[knightm]

I had nothing, then saved 10k, got approved for a 90k loan, looked for ips, saved another 2k while doing this, bought one for 65k, only used 3k for deposit (5%) rest went on costs and rennos. You dont have to spend the earth on the first one - its a good learning experience whether the numbers are small or big.

 

[Simon]

I had nothing, then saved 10k, got approved for a 90k loan, looked for ips, saved another 2k while doing this, bought one for 65k, only used 3k for deposit (5%) rest went on costs and rennos. You dont have to spend the earth on the first one - its a good learning experience whether the numbers are small or big.

Sounds good to me.

Sometimes people want their first home to be like their family home. They forget that their parents started off small and cheap then improved over time.

The first step is to develop a good attitude towards money. Saving and investing are as much an attitude as a activity.

I remember borrowing $5K (prob $20K in todays $) from the credit union to buy shares. I would repay it and do it again. In time I had built a portfolio whilst my mates were buying $20K cars that immediately depreciated. My best mate bought a brand new tricked up Datsun Bluebird in 1984 - wonder what that is worth today?

Sorry I am rambling.

Start small and build experience plus a capital base. The rest is obvious.

Cheers,

 

[wish-ga]

Sometimes people want their first home to be like their family home. They forget that their parents started off small and cheap then improved over time.

Good point Simon... as an aside I think some parents also forget that they started small.

 

[Bricks & Mortar]

Starting small

Good point Simon... as an aside I think some parents also forget that they started small.

That was the reason for the post Wish-ga
Having three children/Adults but each in varing stages

Oldest: Married and bought PPOR last year
Middle: last year of a six year degree (away from home)
Youngest: Full time work, Part time Uni, at home, saving for IP

How small can you start with?
and providing more information to help them along.

 

[Mr. Fabulous]

B&M,

- How small can you start with?

Get an online bank account and put savings in. If you're referring to a home, it depends on the person. I just had a nice chat with Roger who told me that ultimately you could buy a one bed place, but they are very expensive. You're better off buying a two bedroom and renting out one of the rooms.

Just how far out you're willing to live depends on the person as well. I personally would rather pay a little extra now and get something reasonably close to the city that will likely appreciate more than something further out and pay a bit extra initially. But as I've said before, ask 20 investors the same question and you will get 20 different answers. There is simply no one 'cookie cutter' answer to this.

- Providing more information

Get them to read this forum, tell them you are always happy to provide them with advice on matters concerning finance and investing if they want it then let them come to you when they are ready. Remember, you can lead a horse to water, but you can't make it drink.

Mark

 

[Bricks & Mortar]

Thanks Mark,

I CAN make them Drink "but unforunately it would only be beer"
but then again they're not horses.

Yes, I agree with you Mark, we have to await for them to ask.
I've started this post so youngest can be mindful of likewise people who are in her age bracket who are already investing and perhaps ask questions in the forum here. Again perhaps a little premature as she is not yet reading this site. At least the information will be relevant should the questions crop up.

Cheers Timm

 

[skater]

Timm, just drip feed the kids the information. It's amazing how much they learn when it's done gradually, over time. I know yours are a lot older than mine, but I have a 16yr & 14yr daughters & they are both well versed in all things IP. The youngest has registered with the forum & reads it every so often (not much, but all the information is going in, she has even posted a little as well). They both have healthy (for their age) bank accounts that they have saved themselves to start their own investing journey.

Just be there for them & be supportive of any attempts they make to invest.

 

[MichaelW]

Timm,

I was 23 when I bought my first IP. Unfortunately, that was before the FHOG existed so no free kick there. Unfortunately my Nan had just passed away a year or so earlier so I got a small amount of inheritence, about $10K I think. I put this in the bank and kept working and learning then stumbled across Jan Somers' first book. So I started looking and working my IRR and eventually settled on an IP. Not ideal and not what I'd buy today, but an IP nonetheless. It was a crappy 3 bed unit in Carramar west of Sydney. Looked nice enough and was right next to the rail line. Cost $80K all up and was renting for $135, so worked well for my IRR calcs. Made the mistake of factoring standard growth in which never really eventuated as I bought at the wrong time and the area was not good. Despite that, I learnt about being a landlord and it was CF+ after a little while and some paying down of the capital. I sold just before the boom for $75K and lost a little on my purchase price after holding it for 6 years. Today its worth around $140K.

But it did help heaps. Thanks to that, I'm now an avid investor who's not scared of leverage, and that MISSED opportunity only serves to fuel the fire even more. My next IP will be so much better and have so much more potential and I will NEVER sell it!

Doesn't take much to get started, and even if you get it slightly "wrong", its still all "right" in the long term.

Cheers,
Michael.

 

[Bricks & Mortar]

Timm, just drip feed the kids the information. It's amazing how much they learn when it's done gradually, over time. I know yours are a lot older than mine, but I have a 16yr & 14yr daughters & they are both well versed in all things IP. The youngest has registered with the forum & reads it every so often (not much, but all the information is going in, she has even posted a little as well). They both have healthy (for their age) bank accounts that they have saved themselves to start their own investing journey.

Just be there for them & be supportive of any attempts they make to invest.

Thanks Skater,

The wife has been drip feeding us all for years,
It finally sunk in for me about 5 years ago, must be a bit thick and wasn't a big risk taker....... well things have changed!
I'm suspecting it will filter through to the kids a lot lot sooner.
The youngest is working corporate level in Real Estate and she's reading through Jan's books, saving for an IP so her fingers on the pulse.

 

[presto]

It is good to see that you are saving well.
The problem that you have is that when you think that you have saved enough and that will take a while property goes up by say 5%. Say new property at $270k today increase will be $13,500 over 12 months, that would take an extra 45 weeks to save the extra at $300 per week but at that time 11 months later it may have moved slightly again, so you are always chasing your tale.

So let’s say you try this scenario.
New property valuation $270,000.
Contract sale price $270,000

You speak with your parents and they own their own home and may have an investment property them selves.
They allow you to use $27,000 or 10% limited equity in their holdings, it costs them nothing to do this they do not have to guarantee anything.

In other words you apply to borrow a 100% loan, if you qualify for this using your own income and the rental income that you can get a developer to guarantee for 1 year of say $250 per week.

A Discount is negotiated with the developer and a clause is put into the sale contract that allows for a $20,000 discount at settlement agreed by both parties; this is then used to pay all Mortgage insurance, Stamp duty and legal costs with probably $10,000 left over.

So the bank holds 10% $27,000 of parents’ equity over their asset, you own a property being paid for from the tenant and your tax saving, you have a 100% loan but only 90% relates to your property has 10% relates to your parents, you can cover the repayment cost of the 100%.

Now you own a property with out using any of your own money, you have a property value of $270,000 a debt against this property of $243,000 equity of $27,000 and balance of discount say $10,000 = $37,000 to look for your next property and you still have any money that you have saved yourself.

I set this up for my sons, how does this sound, to you out there….

 

[presto]

Forgot to mention, that give it a year or two and the parents get their equity back.

 

[Bantam Roosta]

I saved up the cash to get into Property investing. Had the money put away in a managed fund, slowly building since about 15yrs old. A property came up last year that I wanted, cashed in part of the managed funds and put in some other cash we (wife & I) had lying around. LVR 95% with LMI capitalised on top of that. Total input from us was about $22,000 for IP bought at $245,000. I was 22 at the time. You really don't need a lot of money to start if you want it bad enough.

I don't have a PPOR and don't think it is really needed for equity for someone who is determined enough. PPOR's are probably a great step to help some people get where they want to go, but it will only slow me down as I get very cheap rent.

BR

 

[alexlee]

Agree with Rooster. If you start young enough, you don't need equity in your PPOR, in the sense that you have enough time to save a deposit. After the first few years, you start harvesting equity from your IPs.

My opinion is that buying a PPOR is a good way to force yourself to save. However, in certain market conditions (such as now when the cost of renting is lower than buying) and if you have a savings habit, you don't need to buy a PPOR first.

Also advise them to start small: get them to realise that you don't necessarily have to want to live in your IP (because it's too small, too noisy, not in the right area, whatever). Most of my friends (late 20's, single / married, good jobs) tend to want to go for the palace right from the start. I remember one friend who makes $100k saying 'I can't get a decent place because even an old house in Epping (Sydney) will cost $700k'. Personally, I was more thinking a unit out in Parramatta for $250k or so..... They're still looking and saving.
Alex

 

[young_gun]

Great Post !!!

Im 18 im currently saving stringently and budgeting every dollar that goes into my account . From my investing stratergy and my forcasts im hoping to leverage my first IP around 85 % using a 15 % deposit , hopefully in around 2 years I will have a solid history showing i have a good savings records and stable job . However if I am unable to secure a loan leverage 85 % I will try and get my parents to put one of their places as collateral for my loan. Im pretty sure they will be willing to do this because my forcasts my buying an investment property and my financial plan means even if the house lay untenanted for a year I could still make the full loan repayments.

Im trying to work out all the contigency plans at the moment , but im getting their !!!! You can never be too prepared thats my philosophy,

 

[MichaelW]

However if I am unable to secure a loan leverage 85 % I will try and get my parents to put one of their places as collateral for my loan.

Or you could just take out mortgage insurance and count it as part of your borrowing costs when working the IRR on your investment. Don't drag your parents in to it if you can help it. You don't want to make them lose their IP or PPOR if you have some really nasty accident and don't have adequate trauma/D&PD/income protection insurance and have to default on your IP payments...

Just a thought.

Cheers,
Michael.

 

[Chilli]

Hi Michael,
It is very nice and thoughtful of children not wanting to "drag" parents "into it".

However, as parents, we love to be able to help our kids, and the joy of giving (especially to your own kids) is so great why denying us such a treat !!!
If our son had nasty accident etc resulting in us losing an IP or 2 so be it, IPs would probably be the last thing on our mind anyway..... To be fair he is on his way to 4th IP and has not used any of our equity yet but we HAVE BEEN INSISTING and think he will give in very soon

One should be able to both give and receive graciously, I think.

Cheers,

 

[MichaelW]

Salsa,

Nice one! And a good different perspective on it. I had my "kid" hat on there where I personally would want to go it alone and prove to my olds that I was up to the challenge. I also earn a lot more than they did in their day so wouldn't want to put their hard earnt assets at jeapordy. On the flip side, if my 6 month old comes to me in 15 years time and says "Daddy, will you go security on a loan for me so I gan buy an IP?" I'll probably say "Thazza my boy!"... then "Sure, now lets check out this IP and see what sort of deal you've managed to secure."

Cheers,
Michael.