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Ask Paul: Is it a good time to buy our first property?

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Q. My partner and I live in a remote area in north-western Australia.

I am a 26-year-old female earning $59,000 a year and my partner is a 24-year-old male earning $180,000pa. We have no debt, no assets and own our car outright.

Work pays for most of our expenses and we spend only about $1500 a month.

paul's verdict november

This gives us the ability to save $10,000pm. Since moving here nine months ago, we have saved $115,000 in a high-interest account and are awaiting our tax refunds of $14,000.

We would like to invest in the property market in our home state of Victoria but we are not sure where to begin, who to speak with or whether it is a good time to buy.

This will be our first property (of many, we hope), so we are unsure how to structure our loans and whether to buy for capital growth or cash flow.

We hope to invest for the long term so we will be able to retire early and have the choices in life to do things we love like travelling. - Teri

A. Hi Teri. I am delighted to see that you have a sound long-term plan to create wealth early so you can do the things you love, such as travel.

Shortly we'll have a minor argument about whether a property-only strategy is the way to go but the key issue for me is that you do have a plan and your savings put you in a position to make this plan happen. I suspect that working in the remote north-west is challenging and lifestyle options are pretty limited. But the big plus is you can really save, and $10,000 a month is just terrific - good on you both.

My advice is to ignore a lot of the stuff you read about: salespeople push positive cash flow properties, others push capital growth potential. But property is a common-sense asset and I would really like you to do your own research. In particular, avoid property seminars like the plague. They are run to benefit the promoters, not the attendees, who all too often end up buying overpriced properties in poor locations.

So let's go with common sense. Australia's population will continue to grow, hence the demand for property in areas with jobs, public transport, modern facilities, schools, healthcare, a nice community feel and decent coffee will do well. If you use these characteristics to choose where to buy, I do think you'll end up looking at established, near-city suburbs.

So you won't get a bargain, nor will you get high rental returns. Most sensible people also go for the obvious, so well-located properties sell for pretty much market price. The good news is there will be plenty of properties to look at and lots of recent sales, so you will have genuine market data about real selling prices.

Start looking online to get a feel for prices in the suburbs that appeal to you. I always recommend buying property you would live in - if you'd live there chances are it will rent well and, if needed, sell well. Now is not a bad time to buy.

Sure, prices are high and, while I don't see a collapse, I do think this boom has started to slow. Prices may go back a little but if you buy good property in a good location, don't overborrow and are prepared to hold for the long term, it is hard to see how you can go badly wrong. Mind you, it is important that you spend time looking at properties - the internet is a great guide but don't buy sight unseen.

I am perfectly happy for you to build a property portfolio - but with a couple of reservations. Borrowing is a good plan but be very careful about basing your borrowing capacity on your current level of savings. The longer-term job prospects for you and your partner are critical when it comes to supporting debt.

Also, at some point rising interest rates will push the market backwards. You need to make sure that you can hang in and meet your repayments. Gearing looks great as markets rise but on the way down it magnifies your losses if you have to sell.

Equally, over time I really would like to see you both build your super. This is typically invested in shares, infrastructure and commercial property by professional super managers. This spreads your risk and gives you diversification.

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Paul Clitheroe AM is a respected financial adviser and Money's founder and editorial adviser. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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