How to invest in property (even if you only have a 5 per cent deposit)

It’s always a good time to buy an investment home and the process is easier than many of us might think.

By Andrew Crossley
The goal most Australians have is to provide a safe and secure future for themselves and their families, and property investment is a very popular way to do this.
Yet in the midst of economic uncertainty, rising costs of living and busy work and home lives, many people believe investing in property is out of their reach, although it is simpler than you may think.
Most Australians have a real opportunity to invest in property with less risk and less impact on their lifestyle.
Property investment provides hope for the future in retirement, but it does need to be done correctly.
There are several things to consider in order to do it the right way. To make property investing much more achievable, one important consideration is to have a team around you. This should consist of a good accountant, property adviser, mortgage broker, conveyancer and property manager.
Many of us are time-poor or not necessarily experienced in distinguishing a good property from a bad one. So it is crucial to engage the services of people who can do all the research and source a suitable property and loan for your needs. In other words, people that represent the buyer (you) rather than the seller.
Understanding what your surplus income is will help guide you in deciding what you can afford to spend towards owning a property. For example, if the interest on the loan for a $350,000 property plus other costs, such as insurance and rates, is about $20,000 a year and the rental income and tax deductions from the property are about $17,000 a year, this would mean a shortfall of $3000, or roughly $58 a week, to own this property.
This is a good example of what negative gearing is – when the costs of owning the property are higher than the income produced from the property. Negative gearing can be similar to a savings plan in some ways, in that, in this example, you are spending $58 a week, but you are putting this sum towards the property and it is helping you own an asset purchased for $350,000, an asset which is growing in value over time.
Knowing your surplus income is important in determining what type of property to consider and if the time is right for you. It is always a good time to buy property – it just depends on the “where” and “what”.
If you have a good-sized surplus, you may wish to have an investment property more focused on the capital growth potential, with a reasonable yield. If your surplus is more limited, you may consider a property with a higher cash-flow, but with reasonable potential for growth. In this case, the important point could be to reduce the out-of-pocket costs of owning the property, quite possibly by it providing you with a growing income.
Having a higher cash-¬flow property can be a great way to get involved in the property market while not negatively impacting on your lifestyle. This helps narrow down the “where”. Once the location has been selected, consider the type of property.
To reduce the risk of vacancy, you should have a property which suits the demographic of the area. For example, for an older demographic, a single-storey, two-bedroom property may be more suitable than a large house with stairs. Likewise, a four-bedroom home is more suitable for a family.
The best thing about property is being able to leverage, meaning you are using other people’s money, normally a bank’s, to invest. The more an investor borrows, the lower the deposit needs to be. Lowering the size of a deposit can be important to many investors, as it means they don’t need as much equity in their current home or cash to put towards the property. In fact, all an investor may need is 5 per cent of the price of the property, plus costs. Perhaps an inheritance or gift can be put in as well, but if 5 per cent is contributed, you could be considered for a loan for the remainder of the price.
Investors often have an interest-only loan so as to reduce the mortgage on their home first because it normally is not providing any tax benefits.
If you have the opportunity to purchase an investment property, reduce the risk by seeking the right advice and using the best research.
Using a good mortgage broker is important for selecting the various lending options and advising you on what type of loan is suitable for you in your circumstances. Do your homework thoroughly and always seek the best advice before you start the process.
What to look for when buying an investment property
1.Location: Properties closer to the CBD, transport, shops and attractions, such as the beach and cafes/restaurants, will always be in high demand and able to maintain rent increases.
2.Outlook: Aim to buy a property that is forecast to double in value every decade, in an area where demand is set to outstrip supply.
3.Rent: Look for a place where you can attract premium rent and be able to increase it annually, according to growth in the property’s value.
4.Floor plan: Go for a logical floor plan that feels right when you walk through it. You don’t want
to have to walk through a bedroom to get to the laundry, for example.
5.Future: Think forward to a time when you may want to sell or renovate – will it appeal to owner/occupiers?
6.Gentrification: Seek out properties in suburbs that are starting to be gentrified and outperform the average in property reports.
7.Research: When you find an area you like, go to open home inspections, and monitor sale prices and growth trends.
A version of this article originally appeared in The Australian Women's Weekly's How Busy Women Get Rich 2014 issue.
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