Episode Details

If the recent property price growth predictions become reality over the next couple of years, more homeowners may become ‘priced out’ of their desired location. What might be affordable today, could quickly become unaffordable, as prices can rise quickly.

Sometimes it’s not possible to buy your dream home in one fell swoop. But do not despair. A steppingstone strategy could be the solution.

Buying a dream home has always been a struggle, embrace it

Property has always seemed expensive. I bought my first property 23 years ago for $150,000 and it was a big deal. It was a stretch, financially. It was a dump that needed renovating.

Getting onto the property ladder and buying your dream home will take work. Some sacrifices. A little bit of hustling. But that has always been the case. Focus on the solutions, not the problems.

Focus on building your deposit/equity

If you are income-rich but asset poor, you need to build equity to extend your purchasing power. That equity could come in the form of cash savings/deposit or equity in an existing property.

If your income earning capacity is limited, then accumulating more equity reduces the amount you need to borrow and as such, you are closer to being able to buy your dream home.

Either way, your sole goal should be to build equity.

How to implement a steppingstone strategy

A steppingstone strategy involves buying an owner-occupier property with the sole aim of accumulating as much equity as possible, as fast as possible. Then, selling that property and using the equity to upgrade to a superior property. And continuing to do that until you have attained your dream home.

There are three key steps to this strategy.

Buying a property in a location that is popular and is enjoying rising property price momentum can do a lot of the heavy lifting for you.

The goal is to create equity as soon as possible. Therefore, it’s not as important to form a view about a given location’s long term growth prospects, unlike when buying a pure investment property. You just want to form a view about whether the price momentum will continue in the short term.

Typically, locations that are gentrifying will exhibit above average growth rates. Gentrifying suburbs tend to have similar themes such as a changing demographic, increased renovation activity, new infrastructure and/or amenities that enhance the community feel (liveability) of the location and so on.

Whilst it’s important to not buy at the peak of the market i.e. after prices have risen as much as they will, it is equally too risky to try to pick the next growth suburb, because you could be wrong. Essentially, you want recent evidence that the rising demand for the location is generating price growth. And that prices still have some future upside.

Often, but not always, it is best to buy a house instead of a townhouse, villa unit or apartment. Firstly, houses tend to have proportionately more land value. Secondly, houses tend to offer more scope to improve their overall value e.g. renovation of bathrooms and kitchens, landscaping, adding a room/living area and so on. This is called manufacturing equity when the property’s value appreciates by more than the cost of the improvements made.

Older houses (e.g. built pre-1970’s) offer better opportunities than newer ones, because there tends to be greater scope to ma