Determine your budget (and savings)
When the stakes are this high, you can’t have a champagne taste on a beer budget – it’s important to know what your budget is. Don’t make yourself “house poor” by buying a property that you can’t really afford.
As a general rule, you can borrow about 5-6 times your income.
E.g. if you earn $50,000 per year, you can borrow between $250,000 – $300,000.
Another rule we use is that your repayments shouldn’t be more than 35-40% of your gross income. It’s important not to stretch yourself too thin or you might find yourself in trouble if your circumstances change (if you lose your job or have children). Following this guideline will ensure you have a bit of wiggle room so you won’t have to use your oven as a heater (yes, we’ve been there)!
It’s also important to factor in any other debt you might have, such as a HECS or HELP debt, credit cards etc., as this will affect your borrowing capacity.
Time to go searching
Using your budget that you’ve just worked out, set yourself a price band. Set your limits early so that you don’t find a house you love and later find out that it’s double your budget.
We recommend using four simple criteria when looking for a property.
The first criterion is to stick to the middle-ring suburbs, typically 5-20km from the city. If a suburb is filling up and prices are high, look for the surrounding suburbs. You can pick a suburb you like and find a suburb near it that you can afford.
The second criterion is to stay close to major transport routes. Ideally, you want to be looking at a 10-minute commute to major employment nodes such as hospitals, universities and major retail areas. Another good trick is to leverage other people’s research and hard work (who doesn’t love doing this). Look at where chains are opening up their new stores. Chains such as Woolworths have experts to research the best locations to open up new stores. These locations are picked because they are expected to get a high volume of customers and good capital growth. You can’t go too wrong picking the areas that the experts think are good.
The third criterion is not to sweat the little stuff. If you find a house that is in a great location, has great access to transport, is walking distance to the local bakery and is across the road from a park, don’t dismiss it just because you don’t like the colour of the walls or the blinds are the wrong shape. The small details can easily be changed later, but it’s hard to make the hallways wider and you can’t pick up the house and move it to another suburb. You should also remember that while your first home is a huge investment, it probably won’t be your home forever. You might live in it for 5-10 years and upgrade when you’ve been working for a while.
The last criterion is that timing isn’t as important as time in the market. Property is a long-term investment and it’s important that you see it that way. Property cycles last between 7-10 years on average, so it’s possible you will be waiting that long before you see any real returns.
Real estate professionals have access to a lot of data, so make sure you chat to a broker or real estate agent who can help you with this research. At Red & Co, we pay for a monthly subscription to RP Data, which gives us information such as the median house price in a suburb, recent sales in a suburb, current listings in a suburb, and much more. We are more than happy to provide this information to you for free, you just need to ask.
Once you have your research together, the next step is to put in an offer and negotiate.
Now that you’ve done some searching (or contacted us to help you with your research), you can walk into a negotiation confident that you’re going to get a good deal. One thing that first home buyers will often do is automatically offer the asking price. Don’t be afraid to negotiate. After all, you have more bargaining power than you think. Not all sellers will be flexible but you would be surprised at the number of sellers who are.
This is where your new-found market knowledge becomes a strong negotiating tool.
Sign lots of stuff
Now that you’ve made an offer that the seller accepts, it’s time to sign those contracts. This is where your much-needed finance and legal teams come in to help. Your broker will help you with any loan documentation, including insurance. At Red & Co, our brokers can also help you organise a building and pest report. It’s important that you get a lawyer to check your contracts as well. We know that lawyers cost a lot of money, but it can be much costlier to unknowingly enter into a dodgy contract.
Settle & plan the house party
We won’t pretend to be the experts on planning a house party. But we do know that you should have one!’
For more information, email [email protected] to get a copy of our First Home Buyers eBook!