Just because you’re not flush with funds, doesn’t mean you’ve got no chance of starting a real estate investment portfolio.
Having little money need not be an impenetrable barrier to property investment, provided you’re smart about it and consider a few key ideas throughout the process.
If you are a low-income earner, you probably assume that your home loan application will automatically be declined. Although you may not be a ‘blue-chip’ applicant by the lender’s standards, the outcome of your application doesn’t necessarily have to be “no”.
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Believe it or not, you can actually invest in property with little to no money if you're sensible and have done thorough research.
We should mention that these scenarios are very case-specific and will not apply to everyone, but if you happen to mirror some of the situations that we are about to explain, you will be well on your way to property investment on a budget. We’ll also look at what is required for those on a low-income to secure a property loan.
If you are in a situation where you already own a home or investment property, you can use the existing equity to borrow against, using those funds to finance a new deposit. This is perfect for homeowners who are thinking of branching out to build their portfolio and include a rental.
Accessing equity works in place of you needing to have the actual savings, and as a bonus, the equity will grow faster with more properties, which mean more capital growth. This turns into somewhat of a snowball as the more equity you can access, the easier it is to build your property portfolio.
It is, however, important to note that this common strategy also creates a higher level of risk. While property investors grow their portfolios using equity, so they don't have to cough up any savings, they are at a higher risk of default. Many people also feel that this strategy keeps house prices high as people borrow on top of wealth made during a boom.
Know your budget & go regional
It’s important to not only be aware of what you can borrow and spend but also what that amount will get you in your desired area.
The starting point for an investment-grade property in Melbourne, for example, is around $450,000, but many investors are able to get into the market if they lift their vision outside of the capital cities.
If you’re in Victoria, places like Geelong, Ballarat and Bendigo would be good options to consider.
It’s looking at period style housing, generally within 1km or 2km of the main central business area, so you’ve still got an element of scarcity value to your property. But it should be considered a stepping stone to get back into a city market where you’ll just get more cross-section of demand level and more push on capital growth.
Consult a good finance broker
Don’t limit your home loan options to only your usual bank, or you could be selling yourself short. A finance broker can sniff out the best loan deal for you, including finding a lender that will maximise the amount you can borrow
There are still banks that will give you a higher loan to value ratios.
They’re being restricted by APRA at the moment, as we know, but if you just go to one bank they’re only going to give you their criteria, while other banks might be a bit more flexible and look at negative gearing differently or your bonuses differently. They have different serviceability criteria.
Find a broker who can help you get the right loan for your circumstances.
Use a guarantor
The first point is all well and good if you already have a foot in the property door, but what if you don't?
Another method for how to invest in property with low income is a guarantor loan which helps increase how much you can borrow. Some financial institutions will offer guarantor loans in cases where a friend or a family member will guarantee a percentage of the mortgage on your behalf. They don't even need to guarantee the full loan, which is less risk for them.
Most banks and other lenders will allow the guarantor to cover a certain percentage of the loan. In an ideal situation, the 80% LVR (Loan to Valuation Ratio) sits with you, and the remaining 20% is secured in cash or through the guarantor loan. This means that in some instances approved by the bank, you can use a guarantor to cover the bits you don't have.
You can also remove the guarantor once you have enough of your own funds or equity to cover the debt, meaning your friend or family member only has to be involved for a shorter period.
Before getting too excited about this option, be wary that it is legal in Australia but uncommon. Seller finance is an agreement between the seller of the property and you, where you take a loan with the owner rather than a bank.
Why do this? It saves you needing a deposit. Basically, you agree to pay full price for the property with interest on an ongoing basis and negate the need to have the funds upfront for a deposit.
This is obviously something that benefits the buyer and the seller as they are receiving a full price for their property plus interest and you are negating the need for savings upfront. Keep in mind that sellers may charge steep interest rates and there is no cap or authority governing the loan. Seller is high risk but it offers a chance to get in on a property with a deposit, or when the bank will not approve a loan. If you are able to find yourself where this is on the table, it could work to your favour.
Even rarer than the last point if the process of property options. The idea here is approaching the owner of a property with an amount that you are willing to pay for the option to purchase the property.
Why? The agreement allows you to purchase the property at a lower price if it goes up in value, making a loan for the purchase amount more attainable due to a higher property valuation. As this is more complicated than a standard purchase, you will need to work with a lender who understands these agreements and is willing to base the loan on the valuation, not the purchase price.
Much like getting a financier for a business idea, you could organise a partnership who has the deposit and is willing to foot the bill in exchange for you doing the legwork. This may only provide you will a smaller ownership percentage of the property, but it's a start and a good way to become an owner without the need for the cash.
This works well for those who are money-rich and time-poor that want to invest in property and essentially pay someone else with a share of the property to run the process for them. Property purchase, along with research into new developments to find the right investment, takes a significant amount of time. You may even negotiate them paying the deposit in return for your work organising the purchase, help finance the property with your wage giving you a 50% stake.
You will need to consider the legal requirements involved in this, preferably seeking the help of a professional legal advisor, so it is very clear how profits and losses will be split.
Alternatively, for many potential investors who can’t afford a deposit on their own choice to buy the property with a family member or friend.
But that tactic does have some risks.
The benefit is that, combined, you’ve got two income sources … to prove serviceability and … give you a bigger deposit. The problem is you are jointly liable for the loan, which means if your friend loses their job or can’t keep committing, you are responsible for the whole lot, not for half.
Find a property the bank likes
As the property is an investment, rather than something you’re going to live in, it’s not important for you to be in love with it. Instead, look for a property the banks are in love with and you’ll potentially minimise the deposit they require from you.
If you buy the right sort of property in the right postcodes, they’ll lend you a higher loan to value ratio. For example, if you look at (Melbourne) 3000 and 3004, all those postcodes, Docklands, Southbank, it’s the same in Sydney and the same in Brisbane. Where all those new and off-the-plan properties are, they expect you to put a higher deposit down because they see them as riskier.
Picking the right property
The ultimate goal is for the property’s value to increase as quickly as possible. Focus on one-bedroom apartments in low-rise blocks with less than 20 apartments on the property.
You don’t want to look at things that have got large numbers of apartments. It’s generally an older style block, so you’re in a quiet residential street that’s still close to some sort of village, close to public transport, but not on the main road. Typically, it’s something built between the 1930s and the 1970s and it must have an allocated car space.
Buy off the plan
Buy a property before it is built and, provided it increases in value by the time it is constructed, borrow against the new value to fund your deposit. Look for areas where property prices are likely to surge in the future
Buying property off the plan, as in, before the property has been built, can be a clever way to purchase with little funding – although it can also be highly risky. Self-taught property investment powerhouse Ian Hosking Richards has been purchasing off the plan for years and says it has helped fast track the size of his portfolio.
Hosking Richards says the benefit of buying this way is that if the value of the property increases rapidly in between the exchange of contracts and development, an investor can use this newly acquired equity to fund part or all of their deposit.
Using this strategy, you can borrow against the instant equity to fund the purchase. The key is to buy into a growing market and borrow against the end valuation.
Investors have to tread carefully when using this approach. The strategy only works when an off the plan property is purchased at a good price and in a growing market. The development also needs to have a long lead time.
Strategy: Get the vendor to agree to an option agreement, where you have the right, but not the obligation to buy the property. Find a way to increase the property value and onsell it for a profit
Requires: A vendor who will agree to an option agreement, usually a distressed seller
When a buyer and seller agree to an option, it means the buyer will pay the seller a specified amount – usually, a couple of thousand dollars, depending on the property – to acquire the right to purchase the property at an agreed price until a certain date.
This amount, say $4,000, will usually be credited against the purchase price of the property should the buyer purchase the property. If the buyer does not exercise the option, the seller retains the payment.
During the option period, the buyer has the option and exclusive right (but not the obligation) to buy the seller’s property. Before signing the option, there will usually be a contract of sale already drawn up, which means that if the option is exercised it will be under terms already agreed to.
An investor can use these types of agreements to raise finance if they can find some way to increase the property’s value. This way they can sell the option to purchase to another buyer who is willing to buy the property at its new value and net the profit.
It’s a risky strategy and relies on the investor having two skills: the ability to add value to the property in a cost-effective way (such as a cosmetic renovation), as well as the ability to negotiate a fairly low purchase price for the option.
The other issue is that few vendors will be willing to agree to an option unless they have had some trouble selling their properties.
Qualifying for a mortgage on low-income
There isn't a specific amount you need to earn to qualify for a mortgage as the lending criteria and serviceability models vary with every institution. There is a range of calculators online that will help give you a guide to how much you may be able to afford to borrow.
Your income is one of the most crucial factors in this process as it determines your capacity to make the necessary payments, with loans, expenses, and debts taking into account along with your saving patterns.
Your income sources will include not only your primary wage, but also rental income from an investment property, government benefits, or dividends from other sources. With all of this, the financial institution will estimate an amount for your income in conjunction with your loan repayments and other expenses to determine the amount of money they are willing to lend.
Taking all of this into account, the following criteria is vital for low-income earners who are looking to buy property:
- Evidence of "genuine savings"
- A deposit of 10-20%
- A proposed investment purchase of a viable investment (preferably in a location with predicted capital growth, demand, and high rental yield)
This last point is vital as your potential property needs to be marketable in case it needs to be repossessed and sold. If you are looking at purchasing for an investment, provide the lender with an investment strategy after you have spoken with an accountant and a financial planner to ensure you are making a sound investment. A benefit for you here is that estimated rental income is taken into account when calculating your borrowing capacity. Properties with a high yield help your ability to service the loan.
Figuring out how to invest in property with little money
If you are looking at taking your first dive into the property market, it can be challenging to know how much you should spend on your first property. This can be even harder if you have low income or limited savings, and hopefully, some of the information above will help you make some headway into what could be a fruitful investment plan for your future. Keep in mind the level of risk in each strategy and ensure that it is worth it.
The main thing to keep in mind is not to overcommit financially purely for the sake of owning property. In some cases it may be better to wait until you have a little more collateral to ensure that you don't end up in a dangerous situation which can put you in a financial hole, creating a situation that is the opposite of what you were hoping to achieve. Be smart, consult some professionals in regards to your finances, and make sure that the steps you take into the world of property will benefit your situation