How to buy an investment property on a low-income?
Buying a $400,000 property with just $5,000 money down. It sounds like an instantly dismissible headline on a flyer, but it is achievable if you know what you’re doing.
If you’re a prospective investor or even a seasoned property buyer, and the concept elicits scepticism, you’re not alone. Most investors never consider ‘no-money-down’ or ‘little-money-down’ deals because they believe they are impossible.
It’s a pause for thought. Since most investors never get beyond one or two investment properties and this remains one of the limiting beliefs they cling to, you have to ask yourself if following what the rest of the crowd is thinking is really a smart thing to do. Maybe the concept deserves another thought?
If this is you and you need property investment advice, contact Klear Picture Property Advisors today.
What if you’re a low-income earner?
As 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”.
Whether you're working on a part-time or casual basis, starting out in your career, unemployed or receiving Centrelink benefits we offer tips on how to improve your chances of getting approved so you can realise your investment goals.
Here are our Top Tips to help you invest in your investment property with minimal cash, to begin with.
Radical as it sounds, you could always save up until you've got the money. After all, the property is an investment: you'd not consider investing in shares, wine or vintage pornography without having any capital, so why should the property be any different?
Saving isn't fun – but it's straightforward, it's within your control, and it's predictable. Just track your spending so you're aware of where your money goes, then find ways to reduce it as far as you can.
Look at it this way: every dollar you don't spend on something else (or extra dollar you earn) is a dollar you can invest in property. Actually, if you're using a 75% mortgage, every dollar you don't spend means you can buy four dollars' worth of property.
Some quick tips to have more left at the end of the month:
- Move to somewhere smaller or a cheaper area to save on rent
- Review your day-to-day spending, and I bet you'll find $10 per day to cut out without much anguish. That's $3,650 a year right there.
- Earn more! Start a microbusiness to bring in an extra couple of hundred per month, whether that's selling handcrafts on Etsy or doing the same as your day job on a freelance basis in the evenings
- Cancel stuff you don’t really need like subscriptions and memberships
- Set up a regular transfer to automatically transfer 1/3 of your wage to a savings account as soon as you get it. If the money's not there, you can't spend it
Depending on your situation it might be impossible, but it's probably a lot more possible than you think. If property investment is important to you, be prepared to be uncomfortable for a while in order to make it real.
While you're saving, read about property every day and meet as many people as you can. It'll make you a better investor when you're ready to start, and it'll keep you motivated through all those sportless (no Sky), flabby (no gym) winter nights in Grimsby (cheaper area) knitting funky hats for ferrets (extra income).
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.
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.
Borrow Against Your Home - Use Existing Equity
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.
You might have little in the way of cash, but lots of equity in your own home. Some people in this situation choose to extend their mortgage to release the cash to invest elsewhere.
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.
Is it the right thing to do? Only you can answer that: would you rather be able to start investing earlier, or have the security of paying down your personal mortgage?
If you do decide you want to, there are a few things to consider:
It is 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.
Some mortgage providers will be happy for you to borrow more against your house in order to invest in property, others won't – you'll need to check with your lender or broker
Mortgages on your own home tend to be the cheapest debt you'll ever have, but it does mean that the property you buy will be effectively 100% mortgaged – so you'll have to check carefully that you'll be cashflow positive after repayments
Your residential mortgage will be assessed based on your income, so you'll need to be able to show enough earnings to tap into that equity.
Get a guarantor loan
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.
Banks will offer loans up to 100% to some investors if there’s a guarantor.
Some lenders are now offering for guarantors to guarantee only a portion of the loan rather than the entirety. This can be great because it means that you can get the guarantor off the loan if the property goes up in value or if you pay down some of the debt. It then becomes yours in a short amount of time.
If you want to invest with no deposit then a guarantor could be a good option for you.
Rent Rooms in Your Home
If you own your own home, you can raise money by renting out a spare room.
If you're willing to put in more work, you'll get higher returns by renting your room through a short-term lettings site like Airbnb. You'll have to take the time to correspond with booking enquiries, then check people in and out and deal with cleaning on a regular basis, but the profits can be very high if you live in an area with decent tourist or business demand.
Need a reliable Property Investment Advisor? Contact Klearpicture today.
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
It requires an area 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.
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, I can borrow against instant equity to fund the purchase. The key is to buy into a growing market and borrow against the end valuation.
Hosking Richards adds that 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.
Get experience in other investments
Being a successful property investor requires experience and it requires knowledge.
The investor can make an investment great. But an investor who has no experience and who lacks judgement can also take a great investment and make it a poor investment.
You can actually become more successful in property investments by getting experience in other investing areas.
Consider looking at other investment options if you don’t have enough money to get into the property.
You can get into the stock market for as little as $500 to $1000. You could even look at investing in micro-business – things like websites that generate passive income.
Build a side business
Build a business on the side.
This is exactly what many do as they dont have the time to build a deposit in order to invest in property straight away. So they decided to use some spare time to build a business on the side.
Building a business on the side can increase your income. But more important are the skills that you can learn about investing in property.
Understanding cash flow analysis and financial statements and expenses are one of the hardest aspects of running a business.
But by juggling all these financial balls you actually become better at managing finances. You increase your understanding and ultimately become a more astute investor. And all of this can happen before you’ve bought a single investment property.
Look at Joint Ventures
Rather than borrowing money from your family, if they're keen on the property too you could always invest together – or do the same thing with a friend.
A husband and wife will combine their incomes and combine their deposit to invest in property. You can similarly enter into joint ventures with other people.
You could team up with someone else who doesn’t have that much money or maybe someone who is money-rich but time-poor. But you should always seek legal advice when entering into a joint venture.
Invest together and split the profits. This is another way of investing with a little amount of money
If you do decide to invest with someone you know, make sure you're 100% aligned in what you want to achieve. Discuss what you want to do, how you'll do it, everything that could go wrong, and what you'll do in each of those scenarios. Plan what will happen if someone wants to sell and the other doesn't – or one person needs their money back unexpectedly. Talk about everything, and get it all down in writing.
You could also invest with strangers – or rather, people you meet specifically for the purpose of doing property deals together. This only really works if you've got something other than money to bring to the party – like construction experience, or access to a source of unusually good deals.
Look at cheaper properties
Getting into the property market is very expensive if you live in the inner city suburbs of Sydney or Melbourne or Brisbane. But you can find properties for much cheaper if you go outside of capital cities.
You need to do your research on the area. That is very important. Rural town centres can be great places to invest if you invest at the right time and you choose the right property.
I call it the Two Hour Rule. I recommend going at least two hours from where you live in order to find a property that is much cheaper than a capital city.
I use the example of Sydney. If you go two hours north of Sydney you can buy a three-bedroom house for under $300,000 on the north of the Central Coast. If you go two hours south of Sydney you can buy a three-bedroom house for around $300,000 in Nowra. And if you go two hours west of Sydney you’re looking at places like Lithgow and again properties are very cheap.
The Two Hour Rule is great because it is a short enough time that you can drive to that property and drive home in a day. It is a lot of driving but it can be done. The drive would most definitely be worth it if you found a property north of Sydney for $200,000 or less.
So go outside of your capital city and you will start to see that properties become very affordable.
Even further out are country towns like Moree that have a population of about 10,000 people. There are actually properties in those areas that are under $100,000. They’re not great properties in terms of quality and maintenance but they are often liveable properties that you could rent out.
Expand your reach and look further out. By looking at cheaper properties you may find that you could invest with even just a little bit of money.
Klear Picture is your reliable Investment Property Advisors in Melbourne.
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, so to 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.
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.
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.
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
It 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.
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 the property will benefit your situation.