How to buy property when you don’t have enough deposit or cant borrow

 Information supplied by Property Rocket

Some people think that building a property portfolio should always start with owning your own home first.  Whilst possible, this can actually slow down the growth of your property portfolio mainly for the following reasons:
  1. When you buy your own home, it is more expensive than an investment property as 100% of the funds come from your own pocket, where as tenants help pay the investment loans.
  2. Many banks will require you to pay principle and interest on your home loans.  This requires more of your cash flow, where as an investment property, you can pay Interest Only on your loans and use your extra cash flow to acquire more investments.
Whatever your reasons for wanting to build a profitable property portfolio (of which of course there are many) it is important to understand the hurdles you will have to face and know how to overcome them.

Common Hurdles

1.  Deposit, not enough or perhaps none at all!
Lets face it, these days its safe to say that you need at least 10% deposit.  Yes some lenders will only require you to have 5% deposit, but when you factor in other related costs of a purchase, such as stamp duty, legal fees, mortgage loan fees, agents fees, any set up strata fees, or rates that need to be paid for at settlement, its likely that your 10% will barely help you scrape by. If median prices are at $500K, this means you will need at least $50K to get started, and that is only if lenders will agree to lend you a high loan amount of 90% of the properties value (LVR).  If lenders will only lend you 80% (which is what you can borrow without being charged hefty mortgage insurance fees), then this means you will need about $125K to cover the deposit and associated purchase costs.  Many people cannot afford to part with their hard earned savings, which took them years to accumulate only to be used up in one swoop for 1 property.  Even those with a large amount of savings, would like to see their money go further.

Perhaps your dilemma is that you don’t have any significant savings (or any savings at all) and it will take you years to save up anything decent, by which time prices may have moved and what you thought you could buy with your savings is now significantly less.

Having little or no deposit is definitely a major hurdle each investor faces.  Even those with huge amounts of cash will want to find a way to put little in and still get a lot out.

How do we overcome this?
  • Partner up.  Understand that part of a profit is better than no profit at all.  So if you are willing to share with other investors, you could rapidly build your property portfolio.  Partner with other investors that have deposits.  You put in all the hard work, perhaps offer to take out the loan, the other investor puts in the deposit.  You then work out an arrangement that is suitable for both with a percentage split in the property ownership and profits.
  • Free Deposit Paid For. There are ways to arrange for the Seller to pay the deposit on your behalf.  Most people will raise a cynical eyebrow to this, but it is real and it is happening.  There needs to be specific circumstances for a seller to agree to do this for a buyer, but if there is an additional benefit to the vendor to do this for you, then its definitely a possibility and definitely something that is currently happening.
  • Vendor Finance.  Sometimes sellers can “loan” you the deposit for the property for a period of time in return for either interest charged on the “loan” amount or perhaps a slightly higher purchase price.
  • Create a deposit out of nothing.  There is also the opportunity for a buyer to create a deposit, from either improving the property, making sales referrals to the vendor in the case the vendor is selling more than 1 property, and other creative means which require the right guidance and education from an experienced investor and the correct legal advice.
To get a FREE step by step guide to building a profitable property portfolio using little or none of your own money go to:
2.  Limited Borrowing Capacity
So the bank have told you can only borrow $330K which is a lot less than what you need to purchase the property you want. In this case what is holding you back is your capacity to borrow from the banks.  You may even have numerous properties already under your belt, but the banks have said you have hit the limit to what you can personally borrow.  Now you are stuck and your dream of accumulating enough properties to retire on seems a bit further away.

How do we overcome this?
  • Seller Funding.  In the right circumstances, sellers can sometimes fund the whole purchase for you, so that you are not restricted to what the banks will or will not lend to you.
  • Debt Partners.  Partnering up with someone that has good borrowing capacity and who is willing to take on the loan, will mean that you will need to share some profits with them, but it could be well worth it if it means more assets under your belt and perhaps even more cash flow.
  • Optioning Property.   You can make profits from property the moment you control it and not necessarily when you own it. Option contracts allow you to have the right to purchase property but not the obligation.  Thus you are not obligated to buy the property if for any reason you cannot proceed.  Option contracts are like lay-by for property.  You pay a fee for the vendor to agree to sell the property to you within a set period of time and for a set price. If you cannot settle your purchase within that time, you will loose the fee you paid, but no more.  This saves you from loosing a full deposit on a property and it gives you the power to either purchase the property yourself or on-sell it to someone else, potentially for a profit, all without the cost of the property to you going up.
Requiring a deposit and being able to borrow more, are the 2 most common and largest hurdles that any property investor will face.  There are numerous ways to get over these hurdles, and to mitigate these ever being a problem.  In fact, there is the possibility that your capacity to invest and profit from property is limitless.  With the right information, creative strategies and professional advice, you can be one of those people on the front of the property magazine covers!

Yza Canja is an avid property investor who built a multimillion property portfolio starting at the age of 22 on an income of $25K, having no assets and no savings, and by using none of her own money.  She has worked in the finance industry for over 10 years and now teaches everyday people how to successfully build and structure their property deals for rapid growth and profits, with little cash.

To get a FREE step by step guide to building a profitable property portfolio using little or none of your own money go to:

Disclaimer: information supplied by Property Rocket. While due care is taken, the viewpoints expressed by contributors and/or sponsors do not necessarily reflect the opinions of Your Investment Property.

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