Tag Archives: buying 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.
The house is exactly what you’re looking for at the right price. There are other buyers circling with offers, and you feel an urgency to do something or miss out.
Take a breath.
A real estate dream can sometimes end as a nightmare, but with the right advice and a little investigation and patience, you can minimise the risk of buying to almost zero.
It all begins with taking the time to ask the right questions of your Sales Consultant, and being aware of where to find all the right information that will give you a complete, 360 degree view of the property.
The risk-reducing information you are seeking roughly falls into four categories. (Please note: This article in no way intends to be an exhaustive list, but simply advice for home buyers).
Something that potentially devalues the property
If you inspected the home on the weekend, be aware that the peace and tranquillity that impressed you so much may be non-existent during the week.
There may be rowdy neighbours, barking dogs, or industrial noise close by, or perhaps a local factory producing unsavoury smells during weekdays. Chances are you will only discover this if you visit the home at alternative times.
The boundaries of the land may have looked obvious, but there may be an easement or crown land bordering the allotment that effectively reduce your property’s size from what it seems.
Title searches are available from Government agencies, which will reveal exactly what you are getting for your money in terms of land size, and where you can build any extensions safely and legally.
Be aware that everything you see within the home may not be included. On occasions, sellers may allocate something within as a “chattel” which they intend to take with them after the sale. Ask your Harcourts Sales Consultant for a copy of the chattels inventory.
The difference between a fixture (that which must legally stay with the house) and a chattel can be a grey area, and some potential buyers go to the extent of taking a photo of all chattels mentioned.
For example, the elaborate storage system in the garage, or even an integrated sound system may be classified as chattels if they are not deemed to be permanently fitted to the home and are listed in the sale contract.
Buying Property with an improvement that may be non-compliant or illegal
Laws and regulations change, so even though a home or structure was compliant and legal at the time it was built, it may now be non-compliant or illegal. Normal wear and tear can have the same affect.
Swimming pools are a common case-in-point, with regulations governing pool fencing becoming much more stringent over the years. A pergola built by an owner/builder may look completely acceptable, but only an inspection by a building inspector will give you peace of mind.
Your perceived value of a home could change significantly if you discover that you are responsible for building significant pool fencing or another alteration to ensure your new home meets the appropriate standards.
Building structural flaws
A damp patch in the lawn may indicate faulty water pipes, or mould in the ceiling a leaking roof.
A recently survey of over 3000 homes by building inspectors found that one-in-four homes displayed evidence of structural cracking and movement, while one in eight showed structural pest damage which had the potential to damage the integrity of the entire property.
Sometimes significant structural issues are not immediately obvious.
For these and many other reasons, viewing a pest and building inspection is a no-brainer. Although a pro-active seller will sometimes have these undertaken before a sale, buyers often prefer an independent inspection.
Too risky for finance
If a property is deemed as high risk of flooding or bush fire, or is zoned for commercial development, bank finance may become more expensive, or even impossible. Appropriate searches should discover these factors.
Each State in Australia has different laws governing real estate contracts, so your best bet is to have a good talk with your Harcourts Sales Consultant who will walk you through the finer details of the property, and let you know where you can find further information to give you complete confidence to proceed as needed.
Leaving decision-making to your “gut feeling” can work in many realms of life, but when it comes to buying investment property, those with a proven strategy are more likely to succeed consistently.
If you are actively in the market for an investment property, you will be met with numerous “opportunities”, but only a few are likely to deliver the growth or return you are seeking.
Successful property investors filter opportunities through a set of predetermined criteria, dividing the suitable from the unsuitable.
While there is no foolproof system, investment property success stories are a product of research and careful consideration rather than chance.
Let’s start with the assumption that you are buying a new or near new property which requires little or no maintenance, and have researched and identified a region or town where you want to buy.
When looking at a specific property, what’s the type of criteria you may use to rule a property in or out of your consideration set?
Here’s a quick summary:
Location, location, location.
It’s the absolute non-negotiable of buying real estate. Location can refer to what is close by in a positive sense, for example waterfront, shopping and public transport. Location can also refer to what is close by in a negative sense. For example, if the property is on a busy highway, close to an industrial area, or an airport (such as in the classic movie The Castle), then the possibility of capital gain and/or strong yield reduces significantly.
When assessing the design of a potential investment property favour functionality and practicality first and foremost. What are the important factors in home design that will encourage long term tenants? Some finishes wear more quickly than others, which will increase maintenance costs. For example, carpeted floors wear more quickly than tiled floors.
Value for money.
Relying on capital growth alone to increase the value of an investment property can be hit and miss. It’s obvious, but the sure-fire method to make money on investment property is to buy under market value.
Trusting the developer.
Particularly with property being sold off-the-plan, the reputation of the developer becomes an important consideration. Before buying, you need to do all in your power to perform a background check on the developer to ensure they are not only reputable, but financially secure. The last think you want is to invest in a property off-the-plan that is subsequently abandoned or postponed.
Consider the typical person who is likely to seek a rental property in your property’s location. Whether you are buying in a suburb known for its families, its working class, its prestige, or a high number of students, you should seek the type of property that matches the needs of a likely tenant.
Considering the likely yield of the property (annual rental income (weekly rental x 52) / property value x 100, is it suitable for rental. If the investment property will not return a yield above 4%, than it may not be suitable.
Ideally, your investment property should remain attractive to the market no matter what the economy is doing. For example, a property in the top 5% price bracket may struggle to attract tenants if the economy slows. Favour properties that will be tenanted no matter what the economy is doing.
At any one time in Australia, there will be individual markets going up, going down, and going nowhere. By investing counter-cyclically, for example, buying when others are selling is more likely to lead to a value-for-money deal.
In a crowded market place, look for a property that has an X-Factor – something that will set it apart from other similar properties in the same area. This could be anything – from a stylish Balinese hut in the backyard, a fireplace or easy access to a local park.
Some of these factors are easily discovered. Others take serious investigation and due diligence, but the time you take to establish a thorough understanding of the property to inform your decision making will be well worth it.
To choose a high performance investment property, and reduce your chance of buying a dud, buyers need to first and foremost focus and understand the big picture or macro-environment.