Speak with qualified professionals to help you understand the market and decipher whether or not your indended purchase would meet your investment needs. With the help of a professional, you can come up with a ‘checklist’ of the property and market features required for your investment.
You may want to consult the services of the following professionals to help determine your investment strategy and borrowing capacity, as well as locate a high-growth area:
- Property manager
- Pinpoint Finance (mortgage broker)
- Buyer’s agent
- Financial planner
Investment property expert Michael Yardeny say “They should find a proficient mortgage broker to help them get their mortgage.”
Yardney says that young people should employ a team of professionals to avoid buying a property based on emotion: “Get people on your side, because it can be hard, particularly if you go to auction, as you get carried away with the momentum. How do you know what the property is worth? You don’t believe the estate agent and you can’t get a valuation for every property you look at.
“That’s why you get a buyer’s agent to protect you, but you have to pay a learning fee. You either pay it to the market where you overpay or you buy the wrong property that doesn’t suit your needs, or you pay it to someone to protect you. So be prepared to pay a learning fee.”
If you want to invest in property, you need to start saving as early as possible. It may feel as though putting down a deposit on a property is out of reach, but you may only need $60,000 for a 20% deposit if you invest in a regional area such as Geelong.
To bump up your savings, you may want to contact a financial planner to help you create a budget if you don’t already have one. You should also get into a habit of making regular deposits into a high-interest savings account, this is used to show your lender that you have financial discipline.
Aim for a 20% deposit or family guarantee
As a rule of thumb, you should try to come up with at least a 20% deposit of the purchase price so you can avoid lenders mortgage insurance (LMI) premiums on your loan.
While putting down a 20% deposit may be challenging, it will save you thousands in having to pay LMI in the event that you default on your mortgage.
However, if you can’t complete a 20% deposit, you have the option of using a family guarantor. This is where an immediate family member allows the equity in their property to be used as extra security for your home loan. If your parents are willing and able to become the guarantor, then this can be a great solution for young investors looking to borrow with a high LVR.
If you do this, you will want to split the loan in two portions: the portion your parents are guaranteeing and well as the portion that they are not guaranteeing. You should work on reducing the portion that your parents are guaranteeing so you can release them as soon as possible.
Consider borrowing options
As a young investor, you may want to consider co-borrowing, which involves two or more owners agreeing to share the costs of ownership. This can be a good solution if you both have similar financial goals and circumstances.
Along with sharing the loan cost, the borrowers share additional costs such as stamp duty, strata fees or legal charges, as well as ongoing costs such as maintenance and repairs.
However, this also means that you’d be responsible for the other borrower’s debts if they can’t meet their repayments, so you need to make sure that legal documents are in place.
Once you’ve found the right mortgage broker for you, request to apply for pre-appoval as this offers increased negotiating power when it comes to agreeing on a price with the seller or agent. With pre-approval, you’ll be considered a preferred buyer as you have a lender’s approval already in place, which can help you win a bidding war against others who may not qualify.
In addition, pre-approval can reduce stress by speeding up the documentation process once you’ve found a property.
Note: pre-approval does not guarantee you will be approved the final loan amount.
Demonstrate financial discipline
It’s easy for young people to put things on their credit card and take on extra debts. They’ve got to learn the three fundamental rules:
- Spend less than you earn
- Save the difference
- Invest the difference and keep re-investing it until you have a big enough deposit
Learn to sacrifice and don’t borrow more than you can afford, no matter how tempting it seems. When interest rates creep up after a low interest period, some people get caught out – don’t bite off more than you can chew!
Financial discipline will assist you when you rent a property too as there’s the insurance, the rates and the bond, body corporate fees, the maintenance and the land tax. So you’ve really got to make sure that you understand all the costs – not just the settlement costs but the ongoing costs.
Plan for contingencies
You need to budget carefully to allow for contingencies associated with your income-producing asset. For example, your tenant may lose their job and may not be able to pay rent on time, or your contractor may fall behind schedule. If such incidents occur, you need to ensure that you have enough of a buffer of funds during the interim to cover repayments and other expenses.
Location & property considerations
While your team of professionals will be able to help you decide on the location and property type, you should keep the following in mind:
Look beyond the inner city
Many investors recommend that you invest in regional areas, such as Goulburn or the Hunter region, that have strong growth performance and infrastructure. If property prices appreciate quickly, you can then go on to diversify your portfolio.
For example, the average property price for a house in Goulburn is $324,000, which means you’d only need $64,800 for a 20% deposit compared to a $322,000 deposit for a property in Sydney’s Lane Cove precinct – that’s a difference of $257,200.
While the average weekly rent for Lane Cove is $900 and annual house price growth is at 6.59%, the rental yield is just 2.91%, so it would take significantly longer to pay off this mortgage.
Renovate but don’t overcapitalise
Once you’ve chosen your investment location and property type, you’ll need to consider whether or not you want to undertake repairs to the property. It’s estimated that properties worth less than $200,000 typically require bathroom and kitchen renovations and upgrades in order to attract tenants.
Before embarking on a renovation, determine how much you can afford to spend and try not to overcapitalise. Get the property professionally appraised by a conveyancer and find out what you can do to improve the value of the property. Then get an estimate of what the property will be worth once the upgrades are complete.
Generally, you should budget 10% of the property value for the renovation. So, if your property is valued at $350,000, you should set aside around $35,000 for the project.
If possible, try to fund the renovation through your savings so you don’t have to pay interest on borrowed funds. To minimise renovation costs, consider DIY projects and using second-hand materials.