Income is one of the biggest factors influencing and often preventing hopeful property investors in making their foray into the market. But as Your Investment Property explains, there are strategies to bring down the walls and start investing even when you’re not flush with cash.
Property investing is a great way to make money, but it requires major capital outlay and while lenders often view low-income investors higher risk borrowers, this does not mean you are without financing options, and a little effort on your part can go a long way to scoring you that investment property you’ve been dreaming about.
To increase your chances of having your finances approved, it is essential to save at least a 5% or 10% deposit. Saving as much as you can each month, without tapping into your savings before pay day, actually proves to your financier that you can afford to service this size of a mortgage.
Although some lenders will subject investors to tighter lending criteria, saving a solid deposit will only increase your desirability as a borrower and may even increase your borrowing capacity.
Here are some of the strategies you may want to consider if you are looking to invest on the cheap.
1. Tapping into your current equity
?If you already have an owner occupied property, the equity that may be present in your family home, will give you a leg up above first time buyer investor.
By tapping into the equity in your home you can borrow more than 80% of the value of another property without being subject to LMI (lenders mortgage insurance), because the new loan is secured against your existing equity.
To work out the amount of available equity in your home simply calculate the value of your property minus the existing debt against this property.
For example, if your property is currently worth $400,000 (determined by a professional valuation) and you owe $250,000 on your existing home loan, you have $150,000 in untapped equity. Depending on your current financial situation you may be able to draw upon this $150,000 to help you buy your first investment property.
Let’s say your investment property is valued at $300,000. If you borrow 80% of the value of this property, you will need a standalone mortgage of $240,000 against the investment property. Of course, you will need to finance the remaining 20% ($60,000) as well.
This is where your equity comes into play. You can access the remaining $60,000 out of your existing owner occupied property and use whatever is left for the purchase costs which come hand in hand with buying a property.
By drawing upon the equity in your existing home, you can buy into your first investment property with a smaller mortgage, and in the eyes of your lender you will have reduced your risk as a borrower.
In saying this, there is a portion of risk which still remains. When you draw upon the equity in your owner occupied home, you leave yourself open to losing both properties if you default on your mortgage. It is important you seek professional financial advice before using your family home as collateral.
2. Capitalising costs
If you have less than 20% deposit, you are likely to incur LMI on your home loan. This can cost many thousands of dollars, and on top of stamp duty, it can push your budget over the edge.
Although many lenders are tightening their lending criteria due to the current economic environment, most lenders will still allow you to capitalise many of your upfront costs – including your LMI – into your loan amount.
Bear in mind that while this can reduce your upfront outlay, capitalising costs will increase your monthly committment to the loan and place more pressure on your monthly budget.
3. Buying through joint ventures
Experts say owning 50% of something is better than 100% of nothing. However you will need to make sure you have a Co-ownership Agreement drawn up in order to avoid disputes between co-owners.
The agreement doesn’t have to be complex, but it will require you to have rules and agreements worked out in advance – this is crucial.
Things to be considered should include:
A Co-ownership Agreement should be arranged before purchasing and deciding which ownership structure – Joint Tenants or Tenants in Common – you will be taking.
4. Buy off the plan
Bill Zheng, CEO of Investors Direct suggests minimising your stamp duty cost by buying off the plan or buying at the early stage of a construction. “Together with the first home owner grant and low deposit mortgage product (with less restriction on genuine saving history), you may be able to get a property as your first home,” he says. “In a later stage, you can turn this first home into your investment property and move on to another home. Because you would use up most of your money in the purchase, you will need to make sure that you buy income insurance to protect the loss of income.”
5. Save someone’s financial trouble
Zheng points out that an even more interesting option can be using your saved deposit to solve someone’s problem in exchange for a portion or the whole of a property. For example, if someone is in trouble paying their current mortgage, if they sell the property now, they are not going to have much money left or even run the risk of losing money.
“If you come in and offer them say $10,000 to pay for their outstanding debt and take over their mortgage, you could get your hand on a property that otherwise will be out of your reach,” he says. “Get your lawyer to write up a contract to get them assign all the rights to you for the property, this way, you don’t physically own the property yet as the current owner is still on the mortgage and title, but you are controlling the property 100%, and all the future sales proceeds will go to you plus rental income, etc. This strategy allows you to have the control but not ownership, and enjoy all the financial benefit of an investment property,” he says.