3 WAYS TO GET ON THE PROPERTY LADDER
Want to know how to get your foot on the property ladder?
Whether you are starting from scratch or are paying off the family home, there are several different tactics you can use to get your investing off to a flying start.
The following are three examples of how to make the most out of your situation in order to make your mark as a property investor.
SCENARIO 1: LIMITED INCOME WITH A LOW DEPOSIT
You know it will take you years to save a big enough deposit to crack the market. The thing is, by then, the property in your sights may be out of reach! Even then, you may not have the income to support a mortgage.
You need to find a way to accelerate your deposit saving power and reduce your mortgage repayments as much as possible.
The solution may be joining forces for a short time with some family or close friends.
EXAMPLE 1: TEAM UP TO DEVELOP AND FLIP QUICKLY
Binvested staff member, Yesim Sepek, did just this. Wanting to build a property portfolio, but not having the funds for a 20% deposit, she teamed up with her sister for her first investment.
After borrowing money for a deposit from their mother, the two sisters purchased a run-down property in the Sydney suburb of St Marys. They put a Development Application in to knock it down and build a duplex, which they hope to sell for a profit of $300,000.
With this profit, they intend to repay their mothers loan in full, before splitting the remaining funds between them and going their separate ways as investors.
Another option is to develop a new house on land that has been purchased at a wholesale price.
With the profit earned from selling this development, clients who have done it with a family member or friend can split the cash profits from the sale into two separate deposits – one for them and one for the other.
Co-founder of Binvested, Nathan Birch says, if you are going to invest with another person, it is very important to choose someone you trust and who wants the same sort of outcome as you do.
It is also essential to be very clear on the goals involved. If you are not on the same page, there could be turbulence ahead.
Caution, teaming up for the long haul is not such a good idea. If each party wants to travel in a different direction they will need to consider the goals of the other.
This may mean one buying the other out, or selling the investments and having to start all over again.
By combining income, it is possible to increase your buying power. By developing and flipping within a short time frame, you will be limiting the time that you are financially tied at the hip to your investment partner.
Need to be able to cover the holding costs of the development stage. Can take between 12 to 24 months to bring the project into completion and reap any profits.
Yesim and her sister used a combined deposit of $60,000 to secure the deal.
For a Binvested bulk land development, a starting sum of $70,000 to $100,000 is ideal.
Yesim and her sister purchased the property for $467,000. The build cost is expected to be around $400,000. So an outlay of $867,000 all up.
For a Binvested bulk land development, Nathan says, it is possible to get into a property worth around $800,000 for just under $600,000.
Yesim and her sister are hoping to sell each duplex for $600,000 to $650,000, making around $1.3 million on the sale. After closing off the debt and paying back their mother, they hope to take home around $300,000 between them.
On a Binvested bulk land development, Nathan says, many clients have been able to make around $200,000 in profit after selling – or even more if they hold onto it for a while.
SCENARIO 2: LIMITED INCOME WITH SOME DEPOSIT
You have saved diligently over the years and want to buy property but you still feel priced out of the market!
You’re not sure how you can afford repayments even if you do find a property within your price range.
EXAMPLE 2: BUY AND HOLD A CHEAP PROPERTY WITH A GOOD UPSIDE
This is the stepping stone approach of property investing. Buying a property under market value, with a strong cash flow and good growth prospects can help you get into investing without it eating into your pocket.
With continued saving and some patience, you can then use this as a stepping stone to the next purchase. Repeating this pattern as many times as you can will result in a foundation portfolio that will deliver capital growth and cash flow as the market cycle heads upwards.
A young Binvested investor showed how possible it is for a young Sydneysider to buy an investment property and start the journey by herself. After deciding to cut back on luxuries, she saved a $50,000 deposit and purchased a two-bedroom townhouse in Brisbane for $195,000.
The cash flow on this property more than covers its own costs. She has been able to still enjoy her lifestyle while the property sits in the background. More importantly, she has also been able to continue saving for future properties, with the aim of buying two every year.
This sort of approach is lower risk, says Nathan. It is ideal as a starting point for those with limited funds.
Low entry price. Can buy investment property without needing to save phenomenal deposit or have massive income. Don’t need to put own income into holding which frees up cash for other things or further purchases.
Unlikely to reap significant capital gains over the short term without additional work being done to increase the property’s value. Need to wait a period of time for market to go up in order to get equity from investment. Need to be very careful about the property you buy and the market you buy into.
$50,000 deposit for a $200,000 property.
An 80% lend on a property costing $200,000 would be $160,000. Interest on this amount would be around $8,000 per year.
Operational costs, such as Strata, water and insurance would be around $5,000 a year.
Around 7 to 8% rental return – or, $280 – $300 per week. This would result in a cash flow that is neutral to slightly positive.
While no-one can guarantee growth, you would earn some capital if the property was purchased below market value. If there was good growth, you would earn this in capital too.
SCENARIO 3: GOOD INCOME AND A GOOD DEPOSIT AND STILL CAN’T AFFORD A HOME
You want to buy a home to live in, and although you have a good income and savings, you still feel priced out of an expensive property market.
EXAMPLE 3: DEVELOP A DUPLEX, SELL OR RENT ONE JUST ONE
Develop a duplex and sell one in order to reduce the mortgage or repayment costs on the other in which you live.
Even if you didn’t want to sell the other occupancy, you could potentially rent it out in order to live in your property free of charge, says Nathan. To make this work, you would need to buy land and build on it for less than market value.
He says, he has had a client who purchased a block of land for $600,000. He built a dual occupancy for between $500,000 and $600,000. One of these duplexes would sell for around $950,000 to $1 million, which would bring the investor very close to owning an unencumbered dwelling.
It is important to know the planning restrictions of the area in which you intend to build. You wouldn’t want to buy land and have your development approval rejected.
It is also essential to choose the right builder – one who can do the job well without charging you an arm and a leg.
Make sure you can service loan repayments while the property is being constructed. Having a buffer to cover any delays is also advisable.
Can build two attractive homes and use one to subsidise the cost of the one you live in. This can relieve the pressure on your cash flow.
With any type of development there can be delays and cost blow outs. The DA may not be approved, preventing you from executing your plan. The builder may not be efficient or reliable. You need to be able to cover loan repayments while it is being constructed and this may take up to 24 months.
$150,000 to $200,000.
$500,000 to $800,000 loan size. You would need to cover interest repayments until completion.
$200,000, $400,000, $600,000, $800,000 – “The sky’s the limit depending on what the deal involves,” says Nathan.
Nathan says there are several other options available that can help people get their foot on the ladder. Here are just some:
Mum and Dad investors whose house has doubled since purchasing may be able to take out the equity available in their home in order to build a foundation portfolio.
By purchasing neutral cash flow properties under market value, in good growth areas, they can use their equity to maximise their financial potential for the future.
Once those properties have doubled, they may be able to sell a couple of them to pay off the mortgage on their home. They could keep the rest ticking along while their principle place of residence becomes unencumbered.
Alternatively, says Nathan, they could use the equity from their properties to do a development in order to sell for profit. They could use this to pay down their house while still keeping all of their investment properties.
Older people with capital have the ability to help their grown children by doing a joint venture. The parents could use equity to develop a property with their child and sell it for profit. The parents could repay the equity with their share, while the child could use their profit as a deposit to build a property portfolio.
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