It’s tough to get ahead these days isn’t it?
You may be living the great Aussie dream of owning your own home. But you’ve also got utility bills, insurance premiums, shopping bills, and little Johnny’s school fees to settle.
Not to mention those extracurricular activities. In my family, it’s worth every dollar to tee off at a lush, scenic golf course. It’s priceless to see my eldest son Max calmly walk over to the cricket pitch for a bat, and joyfully whack the ball to the boundary and score a tonne of runs.
It all adds up doesn’t it?
With so many expenses – and a mortgage to contend with – is it really possible to buy an investment property with no money down at all?
Let’s find out one common way it’s done, shall we?
Use your home
A common way people buy property with no money is if they have equity in other property that they can use to borrow against.
If you own a home, your equity is calculated by:
The value of the property less the amount you owe.
For example, if your home is worth $500,000 and you have a mortgage of $300,000, you have equity of $200,000.
Equity is the difference between the market value of your home – and your mortgage balance. This essentially is the amount you own of that property.
Your home: $500,000
Say you want to buy an investment property worth $400,000. What could you do?
You could borrow 80% ($320,000) against the value of the investment property and borrow 20% ($80,000 – plus costs if need be) against the equity in your home.
Investment property: $400,000
Borrow: $320,000 (secured against investment property)
Borrow: $80,000 + XXX (secured against home)
This strategy allows you to borrow 100% of the purchase costs and still avoid mortgage insurance.
So there you have it. Your efforts at paying down the mortgage can help you start investing in real estate sooner than you think.
Note: This is a simplified and general example. Check in with your finance professional or give us a call if you’d like to see if this strategy would work for you.
Other FAQs about how to get into real estate
We’ve been asked some questions lately with a similar theme that I thought I would share with you. As we deal with this stuff all day, everyday, it is easy to forget that some questions we consider basic are actually not-so-basic for those new to property investing.
Like every industry, you know what you know but you don’t know what you don’t know.
How much money do you need to invest in real estate?
This is very subjective based on what type of investment property will suit your strategy.
You will need approximately 15% of the purchase price in either money or equity (minimum) to be able to buy the property.
10% is the minimum deposit most lenders require in the current lending environment.
5% is a good budget to allocate for costs – which is made up predominantly of stamp duty and conveyancing.
What is a good amount to spend on an investment property?
If you follow the formula for successful investing and purchase a property within the median house price of the country, you are looking at around $500k – $550k in the current market.
This is a good price range where this property will be accessible to rent for the largest pool of the rental population in Australia – and affordable for the largest pool of potential purchasers.
Having a strong pool of potential purchasers is essential to our exit strategy, when it’s the right time for you to sell.
As a general rule, the higher we go above the median house price, the more susceptible we are to market fluctuations at times of correction.
This is when you open the newspaper to see on the front cover:
‘Property Bubble Has Burst….We told you so!’
… only to read further to see that a mansion in Poshville only fetched $4m when they were hoping for $6m.
Whereas at the other end of the spectrum, going below the median could find you with a demographic with socio-economic issues that lead to bad tenants.
And let’s face it, nobody wants bad tenants if you can avoid it.
What’s more, the lower end of properties typically have very slow growth, if any.
So ideally, look in the median range if you can.
Of course that’s not always achievable as we have to work within our budgets. Just don’t go lower for the sake of it because you think your risk is lower.
Summary: How to buy an investment property with no money
Many people are missing out on opportunities to get into real estate because they don’t realise what’s possible.
Using the equity in your home can take you from a home owner to a property investor – with no money.
You also have a better idea now of how much is needed to get into the market. And a guideline for how much to invest.
Never depend on a single income. Make investment to create a second source. – Warren Buffet
I hope this has given you ideas on how to get into the market. If you would like some expansion on these answers please give us a yell.