The Barefoot guide to buying your home in 20 months
For many, the great Australian dream may seem out of reach. But this extract from The Barefoot Investor explains how it can become a reality
The first time I ever spoke to my wife - then a single 20-something TV producer at The 7pm Project - she casually explained that she lived in an inner-city one-bedder.
I assumed she rented. I was wrong.
Then I asked if she'd bought it with her ex-boyfriend. Nope.
Then I hinted she must have wealthy parents. Bump-bow.
Hold up, dear reader, I have to call time-out for the next paragraph.
See, as I write this, our sons are still reading Little Golden Books. But one day they'll read these words.
So boys, here's a life lesson from me to you: Daddy was acting like a chauvinist pig and Mummy was a smart young woman who didn't need a man as her financial plan.
All right, let's get back into it.
On one of our first dates, Liz cooked me dinner using a stove she'd found abandoned on the footpath.
Her brother had picked it up, spruced it up and installed it. After she told me about her "find", I proceeded to eat my roast chicken very slowly.
Frankly, I was a little worried that a homeless dude may have found it first and used it as his en suite.
"Obviously, I scrubbed it clean, Scott," she scolded (for the first, but certainly not the last, time).
For the rest of the evening we sat down romantically on cushions, because there was only one chair (and we weren't that friendly yet), and I spent the evening admiring her DIY paintwork.
It wasn't a place I would have bought - it was far too small and, as an investor, I've seen people get screwed investing in shoeboxes like this.
Yet the point is that my wife bought her place as a home first and an investment second. It had a car spot, a refurbished oven and a little brick bookcase - and, most importantly, it was all hers.
Look, I'm a finance guy, so I can't lie ... I was totally turned on by the fact that Liz had bought her home, given that property is so expensive.
No smoky eye-shadow needed to get old Barefoot's juices flowing. Just show me those mortgage papers, baby. Oh my god, that's so ... hot!
Yes, housing is ridiculously expensive
Australians are nutty about property: we speak about it, watch lame TV shows about it (one of which I've hosted) and borrow heaps of money to attain it.
Australia has one of the highest levels of home ownership in the world. Interestingly, in many European countries home ownership doesn't have the same attraction, mainly because they have decades-long leases.
If I were a philosopher - which clearly I'm not - I'd suggest it all comes back to our convict history of trying to establish our roots and live the Australian dream.
But I'm more of a convict than a philosopher, so I'll stick with the facts: - Australia has some of the most overvalued property in the world; - Australia has the highest levels of household debt in the world; - Australia has the lowest interest rates in history, so repaying that debt is (kind of) manageable today.
Look, I own property, but I certainly haven't drunk the Kool-Aid. The truth is that housing in most parts of the country is ridiculously expensive.
The Economist magazine has labelled the Aussie housing market the biggest financial bubble in history.
And yet, regardless of what prices do in the short term, I still passionately believe that owning your own home is one of the best financial decisions you'll make.
Well, owning your own home is like a 30-year forced savings plan and any gains you make over that period are tax free.
Yet buying a home isn't just a financial decision, it's an emotional one. After all, it's where you'll raise your family. It's your castle. The day I bought my first place was one of the proudest moments of my life. It'll be the same for you.
Here's you: Thanks for the motivational rah, Barefoot. But house prices are so ridiculously expensive. With the amount of money I earn, and what I've got saved, I can't even afford a dogbox in Dubbo! At this rate I'll never buy.
Here's me: Yes you will.
The real question (without the drama) is when will you buy your home?
Is rent money dead money?
Someone, somewhere, has told you this - but they're wrong. Rent money is not dead money. Well, at least not in the short term while you get your life and finances in order.
What am I getting at?
You don't want to be pushed into making the biggest financial decision of your life. Too many people are, either out of FOMO (fear of missing out) or guilt (If we bring our baby home to a rented house he'll grow up and get a neck tattoo of Miley Cyrus) or pressure (Why haven't you bought a home yet?).
Take it from me: buying a home isn't always a sign of financial strength; sometimes it's a sign of financial stupidity.
Almost anyone can buy a home with little to no savings, and more often than not they become the financially insecure people I deal with. Financial stress rips families apart.
Ultimately it's you who has to put your hand in your pocket for decades, so for god's sake own your decision. Look, I'm the guy people contact when everything goes pear-shaped. I've been doing this for years and I see people make the same mistakes over and over again.
Mistake 1: They're waiting for a crash
Ever wondered why news websites publish so many stories about an impending housing crash? It's because it's clickbait to a generation that's priced out of the market and has given up, thinking the only hope for buying is a crash.
That's a cop-out. You can't plan your life around something you have no control over; the only thing you can control is yourself and your savings. The time to start preparing to seize opportunity is right now.
Mistake 2: They buy a home they can't afford
The word "mortgage" comes from Old French and roughly translates as "an agreement till death" - and that's exactly what many young families enter into when they mortgage themselves to the hilt.
Things tend to come in threes. I call it the Triple Ms: marriage, mortgage, midgets.
One of my wife's friends came to me for financial advice. She and her husband were both earning decent dough when they got hitched (marriage). So it didn't seem too much of a stretch to buy their dream home in a leafy suburb of Melbourne (mortgage). What comes after a bird makes its nest? Midgets. And sleep deprivation. And, later, school fees.
A few years later, she was a stay-at-home mum. Like most people who borrow too much for their dream home, it quickly became a nightmare and meeting the minimum repayments became a maximum stress.
Is it any wonder the median duration from wedding bells to divorce bills is 12 years?
The truth is that buying a home creates financial stress and insecurity until you get ahead of your mortgage. As all home owners know, running a home is expensive, costing up to 5% of the purchase price each year.
And this is magnified when you take on more debt than you can afford.
Mistake 3: They buy an investment property first
Here's the pitch young couples give me: "We'll buy an investment property to start off with, just to get our foot in the door, and use the equity to buy our family home in five years."
I'm yet to see this plan work (the only exception being couples who buy an investment property to eventually move into). Reason being, the upfront and ongoing costs of owning a home take years to recoup.
My advice is simple: if you want a family home, save up and buy one.
Mistake 4: They rent but forget to save
Renting is generally cheaper than owning because you don't have to pay interest or upkeep. So, financially, you'd be better off renting and then investing the difference into the sharemarket, at least according to a research report by none other than the Reserve Bank of Australia.
It makes sense.
While some people argue that rent is dead money, so is paying interest to a bank. And over a 30-year mortgage you'll spend more money paying interest to the bank than you paid for the original cost of the house.
And when you add stamp duty, legal fees, wear and tear and selling costs at the end, you'd be better off renting and investing the difference.
The only problem with this idea? No one ever saves the difference.
I can work wonders with a spreadsheet and convince you any number of ways you'd be better off, but you don't live life in a spreadsheet.
In the real world there are off-spreadsheet factors, one being that as a renter you don't have the security of tenure. And that extra cash can easily be frittered away, especially if you move every 12 months or so.
Mistake 5: They don't consider the other options
There are options if you really want to own your own home.
You can move into the city. A few years back I made a bold prediction that inner-city apartments (especially in the Melbourne CBD) would be selling at fire-sale prices within the next few years. Even as I write this, brand-new off-the-plan apartments are selling at steep losses in many parts of the country as the oversupply starts to bite.
Or you can move to the country. That's what we did. Less than an hour's commute from Melbourne you can purchase a home on a large block for roughly half what it would cost in a run-of-the-mill suburb of Melbourne.
It's a lifestyle choice: you'll have less of a mortgage, more involvement with your community and more time to spend with your kids.
OK, so we've looked at the biggest mistakes first-home buyers make. Now let's look at how to do it right, Barefoot style.
How to save for a deposit
In drawing up a strategy to manage your money, you should set up a "fire extinguisher" online account to be used for hosing down financial fires. Put 20% of your take-home pay into it, making it automatic with a direct transfer every time you get paid.
When buying your first home, you should save a 20% deposit.
And, you guessed it: it's time to use the "fire extinguisher". Remember, you already have 20% or so of your pay going into this account.
Why a 20% home deposit? It proves (to yourself, as much as anyone) that you're a good saver. But the main reason is that it will mean you won't be hit with lenders mortgage insurance (LMI).
LMI is the bank's insurance against you not being able to make your repayments. And you pay for it. And it's very expensive. If you buy a $500,000 home with a 5% deposit, you'll pay LMI of $15,722.
It gets worse: because you'll have to tack the LMI onto your loan, it'll end up costing you around $30,000 by the time you've paid off your mortgage.
Then it gets even worse: if you switch banks for a better home loan rate, you may well have to pay another $15,722.
Remember: this insurance doesn't protect you, it protects the lender. It's a total waste of money.
Want to get there faster?
First, aim to double your income by working as hard as you can (either through "career compounding" by showing your commitment to your job, pushing for a pay rise, climbing the corporate ladder; or alternatively by combining full-time, freelance and even unpaid work while you set up a business on?the side doing what you love best).
Second, save like crazy. The average full-time pre-tax wage in Australia is $78,832, or $5000 a month in the hand (excluding super). So a couple both earning average wages could live off one income (very frugally) and save a $100,000 deposit in 20 months.
But hold your horses. Saving a deposit is like the Socceroos beating Togo to qualify for the World Cup. It's the beginning of the campaign, not the end. In other words, you want your mind to be set on owning your home outright, rather than just limping over the line with a deposit.
So don't set up impossible savings targets that you won't be able to sustain in the long run.
Home is where your heart is
My plan with Liz was as simple as it was romantic: I wanted to get married, move back to the country and live on a sheep farm where our kids could run around, explore and skin their knees.
Nothing fancy. No Kardashian lifestyle. Simple. Affordable. Enjoyable. Meaningful.
We could have lived in Toorak, like many of my mates who are mortgaged up to their Audis.
Luckily for us we found our own Toorak - 60 clicks away in the bush. It's a place where we are laying down deep generational roots (like an apple tree).
The original farmhouse wasn't flash but we set about making it our castle, bit by bit. We saved up and added a big deck for Louie to play on, curtains to block out the hot summer sun and a $45 bench seat from Bunnings where I'd sit in the sun and read the paper each morning.
A month before the bushfires came through, I remember sitting on the bench seat and saying to Liz, "No matter how much money we make in the future, I never want to leave this place, I never want to trade up. This is enough. This is home."
When you stop competing, stop looking for the next place, you can fully engage with your neighbours and your community.
But many people don't seem to want this. A side-effect of living through the world's longest and strongest property boom is that we're trained in the status-hugging art of "property pawn". A house is just a chess piece to hold onto long enough for the equity to rise, then you trade up to a newer, flashier suburb with newer, flashier neighbours.
I've been to homes of friends who live in trophy suburbs with swanky designer-styled interiors. They have "alfresco areas" (whatever they are) in Melbourne! The result is they look like something off The Block. You could put another cardboard cut-out family in there and you'd never know the difference.
Where are the dorky family photos? Where are the books? Where are the kids' height markers scribbled on the wall in different-coloured pens?
A home should be your refuge, your castle. A place where you can relax and be yourself, like a comfy old jumper.
The day I bought my home was the proudest day of my financial life, second only to the day I paid the sucker off. It'll be the same for you too.
Which brings me to ...
How we bought our family home
When we were hunting for our family home, we went direct.
What does that mean? Well, like everyone else, we looked on the internet but we didn't stop there. We also put an ad in our local community newspaper detailing what we were looking for. We also drove around the area we liked and when we saw a house we liked put a short, heartfelt letter in the mailbox explaining that we were a young family looking to buy our "forever" home.
That's using Barefoot Rule 85: "Don't ask, don't get."
Hard-arse property people will tell you that emotion doesn't come into buying or selling a house. It's a lie. Our little ploy worked and we found our dream property. But here's a confession: I played pricing games with the owner, and we almost lost our forever home. Learn from my stupidity.
If you find a home that you love and that you can afford, don't play games. Put your best offer in writing, straight off. Let them know you're serious. Get it off the market as quickly as you can. Instruct the real estate agent to present your signed offer to the vendor immediately.
Repeat after me: I will not mess around with my forever home.
A few more tips ...
Don't believe your bank. A pre-approval for a loan from a bank doesn't mean they'll give it to you. It's a lot like getting a number from an attractive woman at a nightclub. You're a long way from being invited back for coffee and it may turn out she gave you a wrong number just to blow you off.
Don't believe the agent. An agent's job is to drum up as many people for an auction as possible, which is why they underquote what the property will sell for. Don't fall for it. Instead, do your own research. For $25 you can order a property report online with RP Data that will estimate the value of a house based on recent sales in the local area.
An auction is street theatre and you're the lead actor. I prefer not going to auctions but sometimes you can't avoid it. So act like you're Donald Trump. Stand next to the auctioneer and eyeball the crowd, particularly your competitors. Take charge. And if the bidding goes over your limit, take your bat and ball and head home - the last thing you want is to go beyond your means.
Get good legal advice before you sign anything. An experienced conveyancer is worth their weight in gold.
And remember the golden rule of real estate. It is not "location, location, location"; it's "safety, safety, safety".
How much of a deposit do I need?
You need to save up 20% or you'll pay thousands of dollars in lenders mortgage insurance (LMI).
How much can I afford?
Barefoot Rule 246 states: Always borrow less than the bank will lend you. The repayments should generally be less than 30% of your take-home pay. And if you're planning on having kids in the next five years, factor in the drop in income and the increase in costs.
Should I buy an investment property first?
Not unless you plan on eventually moving into it. It gobbles up your savings and delays you getting into your own home.
Should I wait for the housing market to crash?
No - as long as you've saved up a deposit and you can afford to buy. If you're planning on living there for at least a decade, don't hesitate; just buy.
Should I buy with friends or family?
Friends? No. How many decade-long share-house relationships do you see? Family? Possibly. As long as you're planning on living in it for the next 10 years.
Should I get my parents to go guarantor for me?
No way, Jose.
What about government grants?
If you're buying a home, you may be eligible for the first-home buyer grant. Usually your bank will arrange this for you but to find out more head over to firsthome.gov.au.
This is an edited extract from Scott Pape's book The Barefoot Investor: The Only Money Guide You'll Ever Need (Wiley $29.95).