Tag Archives: investment property
There is no sugarcoating the fact that if you are a low-income earner, buying investment property will require a lot of discipline and sacrifice.
There are a number of challenges to overcome, but although income level is a factor when it comes to borrowing money for investment, there are a lot of other aspects at play, many within your control.
Investing in property remains one of the most effective ways for those on average or lower-than-average fixed incomes to build wealth, so there is every reason to research and dare to dream.
With discipline and planning, those earning a relatively low income can position themselves as a candidate to qualify for an investment loan by paying attention to their credit rating, saving for a deposit and searching for the right investment property.
In a nutshell, your credit rating is about how you demonstrate a healthy degree of financial discipline over a number of years.
Today, all major lenders have access to virtually everyone’s credit history, and although each apply slightly different criteria, most will consider the following factors:
- Stability of employment history
- Regularity of deposits into savings or transaction accounts
- Level of existing liabilities or debts, including credit cards
- Paying bills on time and in full.
The better you perform in these areas over an extended time, the more likely you are to qualify for a loan.
Saving for a deposit
It’s easy to say; harder to achieve, but saving 5-10% of the property value for your deposit will increase your level of suitability to the lender. The act of saving a deposit also proves to the lender that you have the discipline to service a loan.
To avoid paying lenders’ mortgage insurance (LMI), an investor typically needs 20% deposit, plus enough money to cover up-front costs of stamp duty, legal fees and other government charges.
If the prospect of saving a 20% deposit is inconceivable, you can consider other methods to avoid LMI (which usually costs between .5 and 1% of the loan amount), such as approaching a family of friend to be a guarantor to help you complete the deposit.
Guarantee loans allows another person, usually a family member, to use the equity in their own home as additional security for a portion of your loan amount, and are available from several banks and lenders.
Type of investment property
By finding the right type of property, an investor can also increase their chances of qualifying for a loan. Lenders are more likely to lend money on a property located in an area of predicted capital growth, good buyer sentiment and demand, showing higher than average rental yield, and of course, at a good price.
The good news is that the lender will also take estimated rental income that would be generated from the investment property into account when estimating your borrowing capacity. If the property has a relatively high yield, such as 3-5%, then this boosts your ability to service the loan.
If you’re investing in property to generate wealth, you should consult a range of professionals including an accountant, financial planner, a local mortgage broker and agents.
Low-income earners face a daunting task when it comes to entering the investment property arena, but every long journey began with taking the first step, and many of reached their goals.
Many may consider landlord insurance unnecessary, confident that only the best tenants will emerge from a stringent selection process to lease their property.
And with good tenants, what could possibly go wrong with your investment – right?
Time to take a cold shower and consider this carefully. Or how about take a refreshing bath?
A very good tenant, in an apartment building, fell asleep while pouring a bath. The water not only flooded their unit, but seeped through the floor, damaging the ceiling, carpets and electrical appliances in the apartment below. Because the owner of the apartment took out the right landlords’ insurance, he was able to quickly repair the damage to his own unit. He was also able to claim the excess payable as a tax deduction. The owner of the unit below had no insurance, leaving their only course of action to sue the tenants upstairs, seeking to recoup costs for repairs.
Whether it be a house, unit or townhouse, an investment property is often among the most valuable assets anyone will own.
The importance of taking out landlords’ insurance was borne out by a recent survey which revealed that two out of five landlords had experienced tenants damaging property or defaulting on rent in excess of the value of the bond (Source: Home Insurance Comparison).
While standard house and contents insurance will cover such events as theft, fire or various natural occurrences, landlord’s insurance is specifically designed to protect the landlords’ investment.
For example, landlord insurance can cover you for:
- Malicious or accidental damage by tenants or their guests
- Damage caused by structural alterations to the building without your consent
- Theft by tenants or their guests
- Legal action if taking action against a tenant
- Liability for a claim made against you
- Loss of rent if the tenant defaults on their payments or leaves early.
The same applies to investment properties that are units or townhouses, although existing body corporate insurance may already cover you for building and legal liability for public areas. Check with your body corporate to find out what existing insurance policies cover.
As with all types of insurances, the cost and conditions of different landlords’ insurance policies on the market differs greatly, so take the time to talk with your Harcourts Property Manager about finding an insurance policy that suits your specific property.
It is important to buy an insurance based on its suitability rather than price, and to clearly understand which is included and what is not.
For example, some policies will cover only “malicious” damage made by tenants and not “accidental”. Often there are strict conditions that apply to covering default rent payments.
If you rent out a fully or partly furnished property, you may also need to add contents insurance to cover items such as whitegoods, furniture or appliances. There are many other factors to consider.
The good news is, insurance premiums and any excess payments are tax deductible.
Yes, landlord insurance will cost you a small amount each year, but it will save you from sleepless nights wondering what will happen if the unexpected becomes reality.
So how often should you inspect investment property? To ensure your investment property retains its value and marketability, you need to make sure your tenants are fulfilling their end of the bargain and looking after your property. On the flipside, you also have obligations when it comes to upkeep of the property.
There are no guarantees. A tenant with the best references, and who appears to tick all the boxes, can still damage a house or apartment, and cost you the landlord thousands of dollars.
Through neglect a garden can die or a lawn can become overgrown. By accident an oven can be caked for weeks with the remnants of an exploding one-pot wonder, or a pet may be leaving hair and odour in your pet-free unit.
Prevention over cure
When it comes to prevention over cure, there is no substitute for making regular property inspections.
Inspections can sometimes become a point of contention between landlords and tenants. Some tenants see them as an intrusion of their privacy, or feel that inspections are unnecessary.
While landlords cannot control the attitude of tenants to inspections, you can conduct inspections in such a manner so they are more likely to be welcomed.
Remind tenants that inspections are mutually beneficial, presenting landlords and tenants an opportunity to discuss ongoing maintenance issues, or other matters relating to the property. Giving tenants ample notice before an inspection will also build goodwill.
An experienced property manager will know how to conduct an inspection quickly, and with as little intrusion as possible. They will also be systematic in capturing evidence and details of any damage or maintenance that needs attention, and then report back with accuracy.
A five-minute inspection by an experienced property manager can often avert major expenses down the track.
Property inspections should be conducted as regularly as allowed under legislation, and be aware that each state is different – see table below:
DIY or property manager
If you own an investment property a few hours travel (or more) from where you live, you can claim travel expenses as a tax deduction. You are allowed a full deduction where the sole purpose of the trip relates to the rental property, however, in other circumstances you may be able to claim a partial deduction. If you wish to claim tax deductions for the inspection your own investment property, ask your accountant for more information.
The most comprehensive property inspection is only as good as the action that follows
That’s where engaging a local property manager, who has ready access to tried-and-tested tradesman ready to respond, presents a more convenient option.
If you inspect your own property, and do not have these qualified, verified, local contacts, you will probably cost yourself more money in the long run. Also, let’s face it, inspecting a tenant’s property is an uncomfortable experience for everyone – everyone except a specialist property manager who does so every week.
* In Victoria, a landlord can enter a property within 24 hours’ notice if they provide a written application, state the reason for entry and either post or personally deliver the application (allowing two days for postal delivery).
* In New Zealand, a landlord can enter a property within 48 hours’ notice if they provide a written application, state the reason for entry and either post or personally deliver the application (allowing two days for postal delivery). They can also inspect the property as regularly as every four weeks should there be reasons for concern.