NSW south coast resident Leanne Varga has limited options for getting into the property market and wonders if investment property is a realistic vehicle for getting her finances back into shape
Your Investment Property magazine has always been a proud advocator of getting rich through property. It’s the one investment class that deals in a commodity that’s always in demand, and it’s the least risky way to build a passive income stream you can live on.
But what about using property to get out of a tight financial situation? Sure, it seems almost laughable to turn to property investment when you’ve fallen into financial ruin, because property investment, of course, requires money. If you’re broke, that’s the one thing you won’t have. Still, what could your options be? Could you get into the market and, even if you could, what could you possibly achieve?
Meet Leanne Varga. Leanne is 53 and has been left destitute after a divorce. She has received a modest sum of money from her divorce settlement, but it’s paltry when put alongside her modest income of less than $30,000 a year. She also has a dependant and does not own any properties, shares or other investments. A decade from retirement, her prospects of building any sort of property portfolio appear bleak.
“I realise that these days, with the current market, I do not have enough funds to buy a property,” Leanne says. “I’m expecting to receive an amount of $167,500 [from divorce], but I do not want to get a loan, and the amount is not enough to buy a property outright.”
Leanne is currently based in Gerroa, NSW, just south of Wollongong
. She says she is interested in investing in a property in the Wollongong area but doesn’t want to take any significant risks.
“I am a bit worried about risk, to be honest,” she says. “The $167,500 from the divorce settlement will be the only large sum of money that I will be getting.”
Currently renting her parents’ holiday home, Leanne adds that she is worried that she doesn’t own a property to live in either and, in an ideal situation, would have a property to live in while also having an investment property giving her an additional income stream.
She admits that it seems near impossible. “After viewing quite a lot of properties, especially in the area I’m currently living in, I don’t know if I’d be able to buy my own place. I’m 53, with not many working years left. I would prefer to buy outright if I could, but I don’t know where I could get help. I haven’t done this ever before and I’m nervous starting out.”
THE GAME PLAN
The coach: Ian Hosking Richards - Property investment adviser and author Ian Hosking Richards is the owner of more than 30 investment properties, purchased initially on a low income. After being in the market for many years, Ian went on to found Rocket Property, an independent property company. He is also a qualified mortgage broker and real estate agent.
"Leanne’s situation is not unique. She is currently going through the final stages of a marriage break-up and will be receiving a reasonable amount in the way of cash settlement. However, despite these funds she does not find herself in a particularly comfortable financial position.
Her permanent part-time employment in the aged health care industry brings her a modest annual income of just over $20,000, and she still has a dependent child. Her age is also against her, with fewer years left in the workforce and recently introduced responsible lending legislation making her less attractive to lenders as a potential borrower. In fact, as things stand at the moment, she really has no borrowing capacity at all.
Leanne needs to make the most of the cash that she has, as her superannuation funds are also virtually non-existent.
Leanne is in a dilemma. Because this lump sum is the key to her financial future, she needs to use it wisely. Her risk profile is, very sensibly, low. She is averse to large borrowings. However, if her approach is too conservative she will probably not be able to capitalise on her current situation in order to create a more comfortable retirement.
Ideally, she would like to buy a home to live in. She has identified the area that she prefers, and would need a budget of over $300,000 to secure a suitable property. If possible, she would also like to buy an investment property to supplement her earned income.
Given her current situation I think that she is being quite optimistic. Even if she put in a 50% cash deposit on a $300,000 property, she still does not have the capacity to take on a non-deductible mortgage of $150,000. And, unless she can pay cash for an investment property, she is also unlikely to get enough instant positive cash flow to make a huge difference to her income.
However, Leanne has been reading the profiles of successful investors in this magazine and has noticed that quite a few initially started from modest beginnings. Some appear to have been in the same position that she finds herself in now – a single mother on a low income with various obstacles in her way. But they have achieved great things nevertheless. If they can do it, why should Leanne not be able to do the same?
In principle, I absolutely agree. One of my favourite sayings is that it is more about your resourcefulness than your resources. I have met a lot of these ‘rags to riches’ investors and find them very inspiring. All tend to exhibit some common qualities. First and foremost, they tend to be very driven. They have clear goals that are time specific, and they are motivated and committed to achieving these goals. They also tend to be risk takers – sometimes big ones!
Leanne has a conservative approach and does not seem to me to be particularly driven at the moment. This will make it harder for her to achieve results similar to those of some of the investors she has been reading about and taken encouragement from.
Of course, she is still adjusting to some big changes in her life, and it is not surprising if her focus has been elsewhere.
The first thing I would suggest is for Leanne to consult a good financial planner. She needs some sound advice on the opportunities that are available to her over a broad range of potential investments.
Most wealthy people have relied heavily on leverage to build their asset base, so if Leanne wishes to optimise her investment potential she will need to get used to the idea of borrowing money. This means that she needs to increase her income. Due to the nature of her work, even if she works an extra day it will not vastly increase her annual income. If she could increase her income she would improve her chances, particularly when her child becomes independent.
Leanne is fortunate that she is able to rent a property that is owned by her family. Her father has also indicated that he might be open to giving her further financial support to get her back on her feet after the divorce. She will need to have a good chat with him to find out a little bit more of the detail of this generous offer.
As for getting into a joint venture, banks are looking for two main things in potential borrowers – they want to see a deposit, and they want to be assured that the borrowers can meet the monthly repayments.
Leanne has the former, but currently would not be able to demonstrate the latter. If she teamed up with a joint venture partner who had a good income, together they might well qualify for a mortgage. This may be a good option for her to consider; after all, owning 50% of a property is better than owning nothing!
I would encourage Leanne to think about trusted friends or family members who might be open to entering into a joint venture agreement with her to their mutual advantage.
As she enters this new stage of her life, Leanne will no doubt have more time to think about the direction she wishes to go in, and to start to plan out her future in more detail. The clearer she is about what she wants in the future, the easier it will be to put in place a financial strategy and make other changes in her life that will allow her to achieve her goals.
I think the most important thing for Leanne is not to make any rash decisions. She is still at the information gathering stage and will need to review a number of different investment opportunities and strategies before she is in a position to make a good investment decision. I wish her the best of luck.
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