Property investing is a great way to make money, but it requires major capital outlay. While lenders often view low-income investors as higher risk borrowers, this does not mean you are without financing options.
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 it 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.
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 the 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. 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 that 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.
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 commitment to the loan and place more pressure on your monthly budget.
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:
- Co-owners should set up a sinking fund to cover repairs and periods when the property is vacant
- Agreed time to hold the property
- A plan to pay for unforeseen maintenance costs
- How various insurance issues will be handled
- Taxation/depreciation, capital gains tax issues clarified
- On sale to another co-owner and determination of sale price
- Who determines the rent and the tenant
- Contribution of portion of price or deposit
- Which of the co-owners will live in the property and on what basis
- How sale proceeds will be distributed and why a sale would take place and how to resolve disputes
- A co-ownership Agreement should be arranged before purchasing and deciding which ownership structure – Joint Tenants or Tenants in Common – you will be taking.
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 a 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 as 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.”
Reproduced with permission from Your Investment Property magazine (www.yipmag.com.au)