Start by taking stock of your financial situation
Are you a low-income earner, buried in day-to-day expenses? Or do you make enough to afford a home, but for some reason you just can’t seem to save the cash?
Begin by being brutally honest with yourself. Ask yourself the following questions:
- Do I want to buy property because all of my mates are and I’d feel like a loser if I missed out?
- Am I focused on building my retirement?
- Do I just want to be able to quit my day job?
- Am I too scared to commit a lot of cash to an investment property?
- Am I living beyond my means?
- Am I willing to sacrifice a new vehicle, overseas holiday - or whatever it is you fancy that eats a hole in your budget - in order to build up a property portfolio?
If you have honestly taken stock of your situation, cut all extraneous expenses and perhaps even add a second job or income-producing hobby in order to boost your cash flow. Yet if you still fall short of a deposit and buying costs, then it’s time to think outside of the box!
Small successes grow into big ones. Don’t start with a massive development project - buy a small home or unit first. Obviously some money has to change hands before the sale can go through, however the point of buying property when you’re broke is to use other people’s money (OPM) to buy - including buying costs.
You can do this one of two ways - have the money directly given to you, such as a joint venture arrangement, or use the market to access capital, e.g. have future buyers of the property directly give you the funds through the exchange of contracts or indirectly through the bank.
Following are some strategies you can use to buy property and still shell out little to no money from your own coffers:
Off The Plan
This strategy can be a bit risky, but it can deliver some great returns as well. Essentially you’re using time on the market to fund your purchase. You enter into contract to buy a property (which hasn’t been built yet) at the pre-construction valuation figure. By the time the property has been completed, property values in the area should have grown - and you acquire bank financing on the end valuation.
The end result should be that the equity gained during the time the property was under construction (18 to 24 months) should be enough to fund your deposit and perhaps even your closing costs as well.
A typical joint venture involves two kinds of partners - an equity partner and a finance partner. The equity partner funds deposit and buying costs of the property purchase - the finance partner obtains the loan from the bank - or in some cases finances it personally.
If you’re flat broke but have a stellar credit rating, this strategy would work well for you. As a finance partner you can join forces with someone who has the funds for equity, but who lacks the ability to obtain finance. You will obviously share the proceeds of the investment, however this strategy is a great way to “get your feet wet” as a cash poor property investor.
In addition to being able to trust your partner, a key factor in making a joint venture work is that everyone is on the same page. All terms and conditions should be spelled out in writing - including what will happen should one partner wish (or need) to back out of the venture.
An option agreement gives you the right - but not the obligation - to purchase a property until a certain date. A contract of sale is created before the option is signed. Should the sale go through, all of the terms and conditions of the contract must be followed. If you choose not to purchase you forfeit your deposit and the vendor is free to sell to someone else.
Typically, only sellers who are in financial straights will consent to this strategy, so your options will be limited. The idea is that you purchase the property at a discount, add value to the property through a strategy such as cosmetic renovation, and then sell the option to purchase to another buyer at the new valuation amount, pocketing the difference.
For this strategy to work, an investor should not only be skilled at adding value cheaply, but also have the skills to negotiate a low purchase price.
Tap Into Your Equity
If you have equity in your primary residence or that of another investment property you can borrow against it to fund the investment property purchase. You can even use the equity in a family member or friend’s property.
In a strategy similar to off the plan, you can put market growth to work for you. For example, if you’re investing in a strong market you can establish a long settlement date to allow the market time to grow in value.
The idea is that by the time the property settles, you can obtain financing on the new value, using those additional monies towards the purchase of the property.
This can be risky, however, because banks tend to require at least 6 months time to elapse between valuations.
You can also combine this strategy with a cosmetic renovation, adding value even though you don’t yet own it. A simple clause can be added to the contract giving you early access to the property for renovations.
Low Deposit Loans
It’s still possible to obtain financing at 95%, however you will need to have a very strong:
- Employment history - 6 to 12 months at job when application made
- Savings History - including proof of true savings
- Excellent credit
- Strong income - many banks require a minimum salary level to qualify
It’s even possible to obtain 97% financing (including LMI) through non-bank lenders such as RAMS. This means you borrow at 95% plus the costs of lender’s mortgage insurance.
$400,000 - purchase price
$380,000 - 95% mortgage
$ 20,000 - deposit
$ 8,000 - LMI (2% of $400K) - added to loan
When you add the LMI to the mortgage the total amount you can borrow is $388,000 (97%).
If you have a small deposit of 3 to 5 percent and the vendor is willing, you can obtain seller financing, avoid lender requirements altogether. This strategy works best for individuals who have some blemishes on their credit history and cannot meet standard bank criteria.
For those with stellar credit, this option is not recommended because one of the main incentives for a vendor to agree to this kind of arrangement is a higher interest rate with little to no risk for them as they can sell the property should you default in your obligations.
Mum and Dad or even Uncle Phil
If Mum and Dad, or even a family member or friend can guarantee your loan, you might be able to obtain 110% or more without LMI, as their property will be used as security for your loan. The guarantee will be in the form of a second mortgage on their home which can then be removed at a later time.
If you are buying an investment property, it’s possible to obtain no deposit financing if you have a guarantor, however you will be required to meet more stringent requirements. These requirements can be waived, however, if you are still living at home with your parents and are purchasing your first property as an investor.
Property investing is not a “get rich quick” scheme and anyone who denies this fact is lying to you. Sure, you can make a good bit of cash fairly quickly when the markets are right, but overall, property investing is a long term commitment - one that needs to be undertaken only after the investor is fully aware of both the positives and the negatives.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.