I Can’t Afford a House – What’s Next for My Money?

Australia’s love of property has proven resilient throughout the pandemic. 

According to Domain, for the June 2021 quarter, house prices have gone up 18.8% in the last 12 months across the country, with Canberra (29.2%), Hobart (28.4%), and Sydney (24%) leading the way. A reduced surge is seen with units, a 6.7% increase nationally, with Perth (13.7%), Sydney (7.4%) and Melbourne (5.2%) driving the growth.  This continued love of residential real estate has Australia’s largest asset class now worth a total of $8.1 trillion.

With the average Sydney home now costing $1.41 million, this leaves many first home buyers priced out of the market despite having a reasonable deposit. 

So where to from here?

There are many options to build wealth during your working life and owning your home is not the only avenue. Here are five different wealth-creating strategies for young investors.      

1. Rentvesting

The concept of ‘rentvesting’ means buying property in an area you can afford, renting it out to pay the mortgage, then renting somewhere for yourself in an area that you enjoy living in. 

This strategy has become popular with young professionals and families as it can help provide financial and lifestyle benefits. Firstly, it means you’re not tied to one area – renting gives you the flexibility of moving around and not being locked into an owner-occupied mortgage. Buying in an area you can afford also means you don’t have to wait to enter the real estate market – potentially achieving higher capital growth compared to where you rent. 

However, renting a property does mean you are beholden to a landlord which does come with some considerations. For example, they may decide to sell, you cannot renovate or make alterations to the home and there may be other lifestyle restrictions like having pets. Something else to keep in mind with this strategy is that there will be Capital Gains Tax (CGT) implications for when you sell your investment property. 

Rentvesting can be a smart strategy but research is important to reap the best results – chat to a professional adviser for help. 

2. Regular Investment Plan

A regular investment plan is a simple way to build a portfolio of investments over time. Setting aside an affordable amount each month and investing funds into a diversified investment portfolio, can yield capital growth and dividends that help build a sizable nest egg. 

The advantage of investing a regular amount is not only the compounding effect (i.e. generating further earnings), but it also smooths out the impact of fluctuations in the market – also known as ‘dollar cost averaging’. 

Diversifying across different asset classes and within each asset class also helps to protect investments during a market downturn.

3. Instalment Gearing

Instalment gearing is adding a margin lending facility to a regular investment plan. Put simply, each time funds are added to the investment, you can also borrow funds up to a certain ratio, meaning you can increase the amount you invest each month, potentially magnifying the returns. This may help to accelerate wealth creation and as a benefit, interest rate costs on the margin loan can potentially be tax-deductible. 

However, keep in mind that gearing can also magnify losses. So if investment returns are less than the gearing costs, the investor may be unable to service the loan. If a conservative approach is taken with the borrowed amount, it can be a very useful strategy to accelerate growing an investment portfolio.

4. Investment Bonds

Investment bonds are a managed investment where your money is combined with other investors. They’re tax-effective instruments that can be used to build wealth for important life events, such as funding education or as an alternative to superannuation. 

Investment bonds are ‘tax paid’ investments, meaning that when earnings are received on an investment, the fund then pays an effective rate of up to 30%. If the bond is held for at least 10 years, the growth on the investment including contributions will be free of any personal tax (subject to certain rules) and will not attract any capital gains tax on the withdrawal. 

The investment options generally include a wide range of diversified funds and multi-managers and small initial outlays can be used to start investing – meaning there are lots of options.

5. Superannuation

Superannuation is an investment structure that provides concessional tax rates to encourage individuals to save for retirement. The greater the accumulated retirement benefits, the more likely that a higher standard of living is enjoyed later in life. 

Boosting your superannuation balance can be achieved through different strategies but the benefit is that most people already have a superannuation fund so it’s relatively accessible to all, no matter the extent of your investment portfolio.      

The downside of contributing to super at a young age is access to benefits. Funds cannot be withdrawn tax-free until the age of 60 and restrictions apply, which means it’s a great long-term solution but might not be your first choice strategy for the shorter term.      

To explore if any of the above strategies are suitable, it is important to speak to a qualified financial adviser that has an understanding of your current situation and personal financial goals as each investor will have their own risk appetite and timeframe influencing the appropriate strategy required.

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Author bio:

Jessica Brizuela – Associate Partner, Wealth Management 

Jessica has been working in the financial services industry for 15 years and became a new mum in December 2020. 

Working closely with family office clients at Findex, Jessica believes in understanding each client’s unique goals and developing long term relationships with clients. She enjoys sharing her expertise in Wealth Management, Strategic Financial Planning and Superannuation and Retirement Planning.