As the most expensive major city in the country, buying real estate in Sydney has always been difficult, and especially for first-time or younger buyers.
Just getting onto the Sydney property ladder can be a real challenge. We’ve seen many first home buyers calling on the ‘Bank of Mum and Dad’ to help give them a leg up.
But do you know what? Upgrading from your first home to your second home can be even more challenging.
The need to upgrade often exists as we move into a different life-stage – from singles or couples to young families. Often, it is when children come along that we need more space, be it additional bedrooms, another living space or a back yard.
In the inner metro suburbs of Sydney where we mostly buy for FHBs, this often involves trading up from a unit to a townhouse or a small attached (semi, terrace) or detached house.
However, there are fewer houses in these parts, which is where most people want to live. This means that there is always more demand than supply, which can result in young professional couples fiercely competing over scarce assets and thus driving prices ever higher.
No matter what stage of the property cycle we are in, there is always solid demand for quality family-friendly houses in area such as the Inner west, Lower North Shore and the Eastern Suburbs because the lifestyle and convenience offered by these areas underpins their constant demand and strong capital growth performance.
This is why I believe upgrading to your second home can be even more difficult than purchasing your first home.
Consider a $1 million unit growing at 5% per annum and delivering $50,000 growth in the first year. Compare this to a $2 million house growing at the same 5% per annum growth rate. The $2 million property grows by $100,000 in the first year, meaning the gap between the value of the two properties has widened, and is likely to continue to do so year after year after year.
Closing the price gap between the first home and the second home therefore should be the goal for first home buyers.
This is the reason why I always try to promote the importance of strategically selecting your first property to ensure that it won’t be your last.
Successful property investors begin with the end in mind, have a clear plan, and only purchase assets that will take them closer to their goals, often thinking how each property purchase may impact the subsequent one.
In investing, generating above average capital growth and/or building equity by other means, is king.
This means almost becoming obsessed with buying a quality asset that will deliver superior capital growth – rather than a poorly located dud or generic property – to help deliver excellent capital growth and fast track your equity build.
By doing what you can to supercharge the potential price growth, this can assist your upgrading plans in the future.
Strategies to achieve this include looking for scarce assets in the best locations that also feature desirable attributes such as quiet streets, period-style features, flowing floor plans, good outlook and natural light, and off-street parking.
Dwellings that tick all the boxes are typically referred to as A grade properties and will deliver higher capital growth than inferior B and C grade properties.
Another strategy includes buying into an area that may not be your first choice but is one that may outperform the market due to its significant emerging growth drivers such as gentrification and changing demographics.
Adding value to your first home can also assist you in building equity and closing the price gap to the upgrader home. This could involve buying a first home that could benefit a full renovation or an extension.
Larger gains can be achieved where extra bedrooms, bathrooms and living spaces have been added, as well as reconfiguring spaces to match the way we live today, such as open plan living or an alfresco area.
Another popular strategy over recent years has also been rentvesting, which involves buying in another city or state that is at a different stage in the growth cycle than Sydney, while you remain renting in your suburb of choice.
Whilst this can work if executed well, rentvesters need to have the same relentless focus on quality – not believing that any property will do.
Some buyers potentially have the budget to stretch themselves and purchase an upgrader style home as their first property but choose not to push themselves as far as their borrowing capacity allows.
While I understand the need to be prudent and not get in over your head, the prize of futureproofing is large for those who have the budget and risk profile to do so, hence eliminating the whole upgrade challenge in the future (when upgrader homes will be even more expensive).
Being too conservative, especially if you are young and have strong career trajectory can be a huge mistake, and set you back years.
Last, but certainly not least, it is imperative that you buy well, including negotiating strongly during the transaction, so you can improve your chances of making money on the way in.
It is never a good idea to try to time any market, but with prices softening in Sydney, and fewer property buyers being active more generally, there are far more opportunities than this time last year for first home buyers aiming to secure a superior asset – that will also set them up for the remainder of their property journey in the decades ahead.