Four Creative Strategies Helping Millennials Bypass Australia’s Housing Affordability Crisis
Published 7:30 am 16 Jul 2019
With housing affordability near unattainable for many Australians under 40. There is hope, smart millennials are increasingly leveraging their way into the property market through a range of clever techniques. DG Institute Founder and CEO, Dominique Grubisa explains the four most popular strategies.
How to get started in investment properties?
- Look at alternative lending and ownership options
- Consider using your super
- Look for distressed properties
If you’re a young Australian aged 25-34, you don’t need to be told that it’s a tough time to get into the housing market. Despite a cooling in the capital city property markets and record low-interest rates, house prices remain high and homeownership among young people is at its lowest point in decades. Figures from the Australian Bureau of Statistics suggest the proportion of 25- to 34-year-olds who own their own homes has plunged from 61 per cent in 1981 to less than 45 per cent today.
But for Millennials prepared to think laterally and explore all the options, there is hope. Several techniques can help them achieve the deposits and finance needed to buy into the property market – and then stay in it. With prices temporarily in a lull, it could be a great time to take the plunge.
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Strategies to get into the property market
Tip #1: Look at alternative lending and ownership options
While younger people often have some funds to invest, the problem is that house prices are so high they can’t raise the amount needed to buy-in. Two interim solutions to consider are fractional ownership and real estate crowdfunding.
The first of these options involves banding together with friends and family into a small group that together has the required funds to buy a property.
A house or apartment is bought and leased out, and each of the investors reaps the rental profits and any capital gains when the property is eventually sold. Each of the participants thus enjoys the potential benefits of ownership without needing to fund the investment independently. A company or trust structure is generally used so every investor knows what they are buying into.
Another similar option is crowd property investment, where strangers come together to buy a tiny fraction in large property investments. Often run by investment funds via online platforms, such schemes allow investors to potentially buy into massive commercial and residential developments at a level that is comfortable to them.
If your barrier to entry into the property market is being denied finance, another option to consider is peer-to-peer lending. This is where private investors rather than banks stump up the cash to allow individuals to invest in property, often without the same onerous requirements. In return, the investors hold a charge (mortgage) over the properties they help to buy and receive interest until the loaned funds are fully paid off.
Tip #2: Consider using your super
If you’re an older Millennial who has been in the workforce for a few years, chances are you have a reasonably tidy sum in your super fund. While most workers choose to keep their superannuation savings in an established fund, self-managing your super is an increasingly popular option. If you elect to manage your own super, one option open to you is to choose to invest in property as a way of increasing your total super savings.
There are a number of restrictions on the way a property bought this way can be used. The primary purpose of the investment must be to grow your super, and you cannot buy a property and then live in it yourself or rent it to a family member or someone close to you. You should seek professional advice about whether investing your superannuation in property is an appropriate option for you. The ASIC website has more information on SMSF rules.
Tip #3: Look for distressed properties
One of the smartest ways to get into the housing market is to buy a property at under the market value, conduct some renovations, and sell it for a profit. The cost of market entry is potentially lower and with the profit you make you may be able to buy your dream home.
A great way to achieve this is by focusing on the ‘distressed market’ where property owners are on the verge of having their homes repossessed by the bank due to missed mortgage payments.
Ethical investors often step in at this point and buy the distressed property at a reduced but fair price that saves the indignity and trauma of going broke. Or they may team up with the homeowner to develop and sell the property, sharing the proceeds of the eventual sale.
Tip #4: Refinance
If you’re a Millennial who has overcome the odds and has both a home and an investment property, congratulations! You will want to use every trick in the book to reduce costs and maintain and grow your portfolio.
The Australian Taxation Office has approved a tax-effectiveness product that can significantly improve the financial situation for some investment property owners. It works by potentially reducing the interest rate on their home loan to as low as 1.5 percent, while raising the rate on their investment loan.
While their total repayments are roughly the same, the lion’s share is shifted to the investment property where negative gearing can potentially be claimed as a deduction.
At the DG Institute, we call this product Loan Controller and it has helped many clients dramatically improve their tax effectiveness.
The DG Institute has a wide range of tips to help Millennials bypass the housing affordability crisis and enter the housing market. DGI can provide advice on fractional ownership and crowd-funded investments, and the DGI Community is a great place to meet peer-to-peer lenders. DGI can also provide assistance in investigating your self-managed super options, and our Real Estate Rescue program has taught countless Australians how to identify and invest in distressed property. Plus we have great strategies for lifting your tax effectiveness.
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