I have a fifteen year old daughter about to turn sixteen next week. I ponder about her financial future: when will she buy her first home? What will it cost and will she be able to afford anything. With the way property prices have been growing lately it is only a matter of time before the Great Australian Dream becomes exactly that, a dream.
I had a conversation with her the middle of last year and told her about the first-home owners grant in QLD which is $20,000 currently. She had just got her first part-time job and was earning $250 per week while still going to school and I had been contributing $10 per week into her bank account for the past 3 years for pocket money and she had now saved $3,000. I told her about the effect of compounding on long term returns with property and devised an idea.
a) She would need to save us much as she could from her new part-time job on top of the $10 per week we were contributing into her bank account
b) We would match her dollar for dollar on what she was able to save
c) To qualify for the first-home buyers grant she would need to buy new and be 18 years of age (2 years away)
So if she managed to save $10,000 we would match it with another $10,000 and she could possibly get the $20,000 First Home Buyers Grant ("FHBG") giving her a total of $40,000. So if she purchased a $400,000 new home for example she could contribute $40,0000 towards the settlement and borrow the balance $360,000. Also no stamp duty for first-home buyers at $400,000.
The catch is that she would need to live in the house for at least 6 months within the first 12 months of buying it. The other catch is that in 2 years time the grant won't be $20,000 (as it's scheduled to end 30th June 2018).
Moving forward - How is she going to borrow $360,000 when she is only 18 years old and most likely studying at university? She would only have a part-time job and her serviceability would not be enough. Part-time work never looks good for a lender anyway unless she earns $40,000 per annum and is permanent part-time and living at home. You see, parents can only go guarantor on the deposit amount not on the loan amount.
Even if she could get the loan how was she going to afford the repayments? That's $291 per week on interest alone not including principle repayments. Hope she has a good part-time job.
So I had another idea. The only way I could help my daughter get a loan would be to be a co-borrower and split the ownership 1% me and 99% my daughter. Would she still qualify for the FHBG and the stamp duty concession? Turns out not. Both owners need to qualify and I had already purchased my first home 20 years ago.
The only other way that made sense was to forgo the FHBG and for my daughter to buy an investment property with me 1% and her 99%. We could then be co-borrowers and we could get the loan. She would need to save for a deposit of $20,000 plus acquisition costs. The acquisition costs would be reduced if she bought a house and land package with the stamp duty only payable on the land component. Lets assume you paid $180,000 for the land and $220,000 for the build the stamp duty on the land in QLD would be $4,725. We would also need to pay LMI of $8,320 and approximately $2,000 of other costs. Total deposit plus costs is $55,045 requiring my daughter to save $27,522.50 (50% as per the deal). Earning $15,000 per annum part-time, living at home and paying no tax with $3,000 already saved made this possible in the next 2 years.
If we put a tenant in the property paying $360 per week the cashflow would be negative $750 per annum which would be fine for my daughter to pay given she has a part-time job and has already saved and contributed her deposit. She would not get any tax back on the accounting loss due to her income being only $15,000 with no income tax payable up to $18,200. As her taxable income increases over time she would get some of that tax back and the cashflow position would improve
Now assuming she bought the house when she was 18 and then bought another property every 5 years of equivalent value with the equity she created and property values appreciated at 6% per annum on average during that time. This is the result at 10 year intervals (10, 20 & 30 years on)...
Age Value Equity Wealth pa 5% return
28 $2.149m $0.497m $49,738 $24,869
38 $6.414m $2.521m $126,058 $126,058
48 $13,784m $8.174m $272,484 $408,726
Sometime between the age of 38 and 48 she should be comfortably retired. Not 65. She would not have to contribute any further equity to build this portfolio either. It is a set and forget strategy with capital growth. Over time the level of debt to portfolio value decreases therefore reducing risk over time. The 5% return is based on her equity position and estimates a retirement income.
This all looks too easy however requires discipline to firstly save for the deposit and secondly to stick to the plan and not sell any of the properties. How many parents have a teenager who is willing to save most of their income from a part-time job to make this possible? How many teenagers have a parent or a mentor who can guide them through this process and show them what is possible? This is why the large majority of Australians retire with a partial or sole reliance on the pension. You may be one of those parents who has plenty of equity in your home and can provide the deposit for your child and get them started early on their property portfolio however will they achieve the same outcome if they did not sacrifice anything to buy that first property. They may be more likely to quit early on and just sell out when times get tough.
My fifteen year old daughter will buy a property by the time she is 18 years old. This reminds me that people are capable, at any time in their lives, of doing what they dream of.
At the time of publishing this blog she has now saved over $7,000 and is determined to reach her goal of financial independence in her late thirties or early forties.
I hope you enjoyed reading our article. We do not charge for education, we just wish to inform. If you like our articles then please give us a "like", "Tag a friend" or "Share" it around. We appreciate every bit of support!!! :)