In the wise words of Prime Minister Scott Morrison, “the best way to support people renting a house is to help them buy a house.”
While his statement received quite a bit of backlash, he wasn’t totally wrong.
With rent rates at an all-time high, having achieved 11% growth nationwide in the last 12 months, young investors have a prime opportunity to get into the property market and reap the benefits of rentvesting.
But the problem remains: How will they afford it? Leveraging the five tips outlined below will help young investors crack the property market sooner.
When it comes to investing, it’s important to understand what the banks are looking for when applying for a loan. While this does include a deposit, there are a number of factors that can influence your overall borrowing capacity which you must be made aware of, including but not limited to:
- Income and Expenditure
Lenders will consider your income when determining your borrowing power as it provides insight into how much you can afford in repayments as well as your employment history. Lenders will also examine your bank statements to get an idea of your spending habits by asking you to provide either credit card statements or an itemised list of your monthly expenses. Through this approach, lenders can consider how much you spend each month on expenses, hobbies and entertainment which will help them form an opinion of whether you live within or beyond your financial means, ultimately depicting the size of your home loan.
- Debt and Credit Scores
A credit score is a number that determines how reliable you are as a borrower. Measured on a scale of 0 to 1,000, the higher your score, the more desirable a candidate you are to lenders. Assets such as cars, superannuation and any properties you may own already as well as liabilities like credit card debts, HECS or HELP debts, personal loans, car loans, home loans or credit cards you may have may hinder your borrowing capacity as lenders will factor this in as a future debt.
- Deposit and Savings
Lenders look favourably on your application if you have a proven history of savings contributions as it demonstrates that you are able to save towards your deposit and highlights your ability to manage your money. By showing your lender that your deposit is made up of genuine savings that you’ve grown over time can give them greater confidence that you’ll be able to afford your mortgage repayments.
Successful property investing comes down to 80% behaviour and 20% knowledge.
The 80% refers to your ability to curb unnecessary spending, pay down debts and make consistent contributions to your savings, while the 20% refers to understanding what lenders look for, how finance works and how to select an investment-grade property.
A great way to maintain accountability towards your deposit is determining your WHY.
Your WHY is the sole driver behind your desire to create wealth through property.
These motivators could be:
- Securing a stable future
- Creating financial comfort
- Setting up your children
- Living without financial burden and stress
By identifying your current financial concerns alongside the stress and discomfort that comes with them, you can use this to your driver to achieve where you want to be. Ultimately, by maintaining accountability, you can look forward with your money as opposed to looking back and wondering where it went.
The greatest advantage that young property investors have is time. By starting the journey early, young investors gain the opportunity to reap the benefits of investing in property in the long term by way of education, rentvesting, finance, diversification and more. For example:
- By becoming aware of the benefits of property wealth creation, investors can gain a head start by diligently saving for their deposit at a very young age, creating the opportunity to generate a passive income from their early 20s.
- Over time, young investors can buy several investment properties to build their wealth. The sooner they buy your first income-producing asset, the sooner they can diversify their portfolio and buy other investment properties.
- The longer a young investor owns a property, the more it will appreciate in value. For example, if an investor purchases a property valued at $450,000 at age 25 in Melbourne and reviews it at 35 – they will have achieved 80% growth (based on 8.1% growth – ’25 Years of Housing Trends’, Aussie, pg. 5). In contrast, if they were to purchase the property at 35, they would have incurred an opportunity cost of $364,500.
- Investments for young adults are being used as a stepping stone, as it may be cheaper to own a rental property than a home. The repayments are subsidised by the rent and investors gain various tax benefits such as depreciation and negative gearing.
Consider Your Borrowing Options
Generally speaking, loans for investment properties are not very different from owner-occupier loans. However, in order to create a successful property portfolio, you need to have a solid investment strategy in place to determine which loan type suits you best as it can significantly affect your cash flows.
The three main borrowing options are:
Principal and Interest Loans: In this type of loan, the repayment is made up of the interest rate and a portion of the principal, meaning you pay a part of the original purchase price along with the interest from the beginning. This is the most common type of loan used by owner-occupiers who aim to pay off their mortgage in the shortest amount of time.
- Interest Only Loans: This type of loan is the most preferred type of financing used by investors because it can be used to maximise their tax-deductible expenses. Interest-only loans can be fixed or variable.
- With an interest-only loan, repayments will only cover the interest component of the loan for a set period of time and do not reduce the principal amount owed. Because debt on the property is not being paid off, repayments are kept to a minimum and can be claimed as a tax deduction.
- In most cases, interest-only loans are for a maximum five-year term (depending on your loan provider). At the end of the agreed term, this is reverted to a principal and interest loan unless a further interest-only loan is negotiated and agreed upon with the relative lender.
- Equity Loans: If you already own a property (i.e. you have a principal place of residence), you are eligible to use the equity in your property to secure a loan for an investment. Most lenders allow investors to borrow up to 80 per cent of the equity in their home.
Engage an Expert
At AllianceCorp, we are well aware of the challenges facing investors, particularly young investors – which is the driving mission of our business. Leveraging our team of experts, we want to provide new investors with quality education and resources to best equip them for their property investment journey.
Whether you’re ready to invest or want to get into the market but don’t quite qualify for a loan, you have certainly come to the right place – we cater for your needs, no matter the circumstance!
For those needing some help to get into the market, our Investor Express program is the answer for you. With the expertise of our cash flow management specialists, you will gain access to an array of programs that can fast track saving for a deposit from five to two years – an opportunity that simply cannot be overlooked in today’s property market.
Interested? Simply fill out the form below and kickstart your property wealth creation journey today.