A portfolio with your first pay packet

Profits and peace of mind await young investors.

Buying a property in your early 20s is one of the smartest decisions you will ever make. Not only will you get a jump-start on building wealth, you also won’t be left struggling to pay off a mortgage later in life.

According to recent studies, the earnings of most Australians peak at the age of 48 and yet many people today still have a large home loan well into their 50s.

There are other advantages to buying when you are young. You have an equity stake in an asset that should grow and provide collateral to buy other assets.

Property values move in cycles. They can fall as quickly as they go up but studies show that over many decades residential property and shares grow on average about 11.5 per cent a year.

The sharemarket adage that time in the market is more important than timing the market is also true of property investment. So entering the real estate market at a younger age is more profitable in the long run.

But buying a first property is rarely easy, especially when you are earning entry-level wages. Paying the upfront costs and then regular mortgage outgoings can lead to financial stress.

Another downside is that financial constraints often mean first-home buyers are forced to buy in a cheaper area, where they may not want to live – a trade-off for getting a foothold in the market.

Some young people are neatly sidestepping this problem, however. The chief executive of Resi Home Loans, Lisa Montgomery, says instead of buying a first home to live in, many young buyers now opt to buy an investment property.

”They then leverage those dollars down and go into their first home at a later date,” she says.

Ms Montgomery says poor housing affordability is contributing to the trend. ”People are choosing to rent in areas that are within a five-kilometre radius of the city because that’s where they want to live,” she says.

”But the prices are too expensive to invest in those areas. So why not live where you want to live and invest in a less-expensive area?”

The chairwoman of industry group Property Investment Professionals of Australia, Margaret Lomas, says young people are recognising that prices are too high and the yields from rents too low in inner-city areas.

A growing segment of this group is using available cash flow after paying rent to invest in cheaper property in a suburban or regional area, she says.

Other Generation Y investors live with their parents at low cost and pay off investment properties.

Young investors often have a big appetite for risk. Ms Lomas says some older investors prefer to leave 70 per cent of their assets unencumbered when borrowing to invest but Gen Ys have greater personal cash flow and job security and are further away from retirement. These factors mean many are comfortable with borrowing 70 per cent against their total assets.

”There is nothing wrong with building a property portfolio this way and renting for the rest of your life if you don’t mind that you might not have tenure and you might be asked to move when you’re not ready to,” Ms Lomas says.

Ms Montgomery says if you buy your first property as a rental investment and don’t live in it, and then buy a second one as an owner-occupier, you still qualify for first home owner grants.

Because values move in cycles, it’s easy to pay too much.

Try to buy low and sell high. And if you can’t afford to hold an asset for the medium to long term and ride out the bad times, you shouldn’t be investing.

Chris Tolhurst, domain.com.au

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