Expert Advice with Philippe Brach 15/06/2016
Without a doubt, one of the biggest challenges investors face is building a deposit to fuel further property purchases.
A decade ago, this wasn't necessarily the case. Back then, you could purchase well-located properties in central suburbs for under $400,000. Perhaps they weren’t in the prime inner city suburbs of Sydney, but they were in quality, sought after neighbourhoods in major cities like Brisbane.
Take the Brisbane suburb of Chermside, for example. The median house price in 2007 was $388,000. By 2015, it had surged to $550,000, according to RP Data/CoreLogic figures.
Amassing a 10% deposit on a $300-$400,000 property is achievable. On a $600,000-plus property? Not so much!
Pulling together a 10% deposit on a $600,000 home – plus stamp duty of up to $25,000, plus other buying costs – means buyers won’t have much change from $90k to get into their next property.
But with median house prices in capital cities hovering between half and three quarters of a million dollars, investors often need a huge chunk of change in order to get into a deal.
The prospect of saving six figures to buy a property can be intimidating to say the least, which is why many investors struggle to save a deposit.
Why you’re struggling to save a property deposit
If you’re interested in buying your next investment property but you don’t have the means to put together a deposit, that doesn’t mean you're out of the game altogether.
It does mean you need to get clear on your next steps, however.
Working with investors for a number of years, I’ve found that the main reason people have trouble putting a deposit together is a lack of clarity and focus around their finances. When you’re busy paying your bills and managing debt, it can seem impossible to see a clear path towards actually saving some money.
Here’s what I suggest to get started:
Get rid of debt
You need to get really focused on getting your finances in shape. This means paying off all of your consumable debts as soon as possible, so your credit cards, personal loans and car loans need to go.
Upgrade your shopping habits
Your credit card is a debt that costs you up to 20% every time you spend. Think about that each time you charge something to plastic: Are you willing to pay a premium of 20% for every meal, every grocery shop, every household item that you charge to your card? I’ll bet the answer is no. I’m not advising you to stop your discretionary spending altogether, I’m just saying you should stop spending on your credit card; if you can’t pay for it in cash, then you shouldn’t be buying it at all.
Create a savings plan
With your debts and spending under control, you need to start a solid savings plan. The time-tested tradition of saving 10% of your take-home pay is a great place to start. If you take home $5,000 net a month (a pre-tax annual salary of around $75,000), this means $500 should be funneled off to your high-interest savings account.
Save your tax return
Boost your savings account balance with your tax return refund each year. Whether it’s $2,000 or $20,000, it’s going to help you invest into your next property sooner.
Tap into equity
Do you already own investment properties or your own home? Then make sure you get your home loans ‘health checked’ at least every 12 months. You may have new equity to tap into, or there may be better loan products on the market that could save you money, giving you a better borrowing position (and with it, the ability to borrow a higher LVR).
The moral of the story in all of this is that when you’re committed to your outcome, which in this case is building a good deposit for your next property, you can achieve your goal with a little discipline. It’s also always in your best interest to partner with a qualified finance expert who is experienced working with investors, to help you make the most of every dollar you invest.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property
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