First Investment Property: Saving for a deposit

[Dr Pump]

Hi Guys,

Im new on the forum, this is my first post, the first of many i would hope

Im a young guy (young 20's) and Im looking to get into IP in the close future.

Like many people my age who are interested in IP, saving enough for a deposit is often the first hurdle.

The dilemma is: how aggressively should i be saving for a deposit?

Reports in the media suggested a slowing market and rising interest rates slowing down the rise in housing price growth. I've been afraid that I will forever be playing the catch-up game (as housing prices grow, so does the deposit required by the banks).

So upon hearing the news, Im thinking to myself: "This is great, the slowing market can give me a bit of breathing space to save for a deposit. I can take a bit longer, and the prices will not have jumped as dramatically as they did in the 2006-2007 period"

Is this the wrong mentality to have? Or should I save as aggressively as I can and get my foot into the market within 12-18 months? Will the market have changed within that time period?

(P.S. currently Im currently putting away 75% of my earnings into a savings account for the deposit)

 

[buzzlightyear]

The dilemma is: how aggressively should i be saving for a deposit?

The answer is depends...Its really a combination of pure mathematics, the other of lifestyle ie yours, and your ultimate property choice (ie type, location, price point...)

As for the mathematics side, say a $300k property at the end of last year, might be worth $240k now or later this year. Assuming a 10% deposit, that is still $33,470 (deposit & stamp duty for IP ). Still no small task, irrespective of your ability to save eg living with parents.....depends on how much you have currently saved as well.

You are also in your early 20's, so you also don't want to just be saving all your money for an investment (whether property, shares or other). You still need to live and enjoy yourself, party, travel. So a balance is critical. Once you go down the path of IP investment, it does get infectious (well at least for me it has), and there will be plenty of time, to be financially responsible and restrained in your discretionary spending. Once you start, it is difficult to go back, so enjoy the time, when you are obligation free

As for the type of property choice, you can buy a 1br older style flat in inner melbourne for mid 200's, some even less. Will they drop as much as say a larger home in the mortgage belt. IMO, no. I still have seen decent prices for well located flats in inner Melbourne. Did you have an area or a few suburbs that you were interested in?

If you are serious about purchasing an IP, I would set yourself a realistic saving target, one that doesn't mean you can't shout your friends a round at the pub and if you get to your target or are able to purchase ahead of time, at least that provides you with more options.

What the current state of the market does allow you to do, is that time is on your side. No chasing your tail! And aside from the opportunities for the right property at the right price, that are/will present themselves, it will give you a good chance to learn to perform due diligence, understand agents and how they act, the art of RE negotiation.

And of course time enough to develop a co-dependent relationship with this forum

 

[Banked]

As for the mathematics side, say a $300k property at the end of last year, might be worth $240k now or later this year.

Hi Buzz,

Interested to hear your thoughts on the likelihood of this happening around Melbourne. Or were these figures just used as an example? 20% is a pretty big decrease in value.

Cheers,
Banked

 

[steveadl]

Welcome to SS Dr Pump.

Is your first property likely to be one you'll live in, or purely an investment? You may be able to buy a cheaper property than you would otherwise live in yourself, and this can get you into the market sooner.

Having said that, don't stress too much about missing the boat. There is always going to be cheap enough property for you to buy in a capital city (and even more so if you go outside cities), and whilst the prices will likely continue to rise - it's often lumpy growth where prices in certain areas you may be interested in don't move much for a couple years before heading up again. This gives you the chance to save more in the mean time.

It may help if you post some figures ie. what price range of IP you're thinking about, and time frame it will likely take to achieve the 10% (?) deposit you want. But remember, you have to still enjoy life along the way, and 70% sounds like a fairly sizeable chunk of your income unless you're earning fairly big bucks?

 

[caporale]

Welcome aboard Dr Plum.

Given where we are in the current property cycle, i would get in with as less deposit as you can, pay the mortgage insurance, then wait for your property to grow in value.

You will need around 5% for stamp duty and legals etc... and probably a minimum of another 5% for a deposit. Sure the bigger the deposit the better (saving you some mortgage insurance and reducing your debt). If properties take off again in price you don't want to be left out.

Find a good broker (there are plenty on this forum) who can give you examples of your costs and interest payments for various deposits. And the First Home Owners Grant (FHOG) benefits if applicable to you.

Just my 2 cents worth.

 

[Lucyinthesky]

I am of the complete opposite opinion of Caporale. I think that in this climate you wouldn't need to rush into anything. I guess it depends on where you are looking and if you believe that our current economic climate will improve soon or if this will be a drawn out affair with many more bargains on the horizon.

 

[buzzlightyear]

Hi Buzz,

Interested to hear your thoughts on the likelihood of this happening around Melbourne. Or were these figures just used as an example? 20% is a pretty big decrease in value.

Cheers,
Banked

Just an example, not a real life scenario. Trying to illustrate the point that saving for even a vastly reduced price, is still a challenge. I ws never good at it when I was younger.

Is it possible? Well, I am sure you could potentially find some examples of this happening, but would it be reflective of the whole market?