Deciding to enter the real estate market at a young age is a bold decision.
To get the most out of your property investments and to lessen the associated risks I've been running a series of articles over the last few days based on an interview I had with finder.com.au regarding investing in property at a young age.
Here's 10 tips I gave them, and while we are particularly talking about young property investors, they really apply to investors of all ages:
1. Educate yourself
Subscribe to blogs, online forums and publications from sources such as realestate.com.au, Investor Assist, Australian Property Investor, Real Estate Investor and Property Investment Resources Australia to learn the ins and outs of property investing.
Research property prices, land tax and government charges as well as socioeconomic factors of the area to determine whether the region represents a good long-term investment.
Young investors should become familiar with property investing and different markets:
“They should be educating themselves with all the information out there on the internet. But what they’ve got to understand is how property markets work and not believe the myth that all properties increase in value.
They’ve got to understand about budgeting and personal financing. They need to learn about valuing properties and inspecting properties.”
2. Seek advice
Leverage a pool of qualified professionals by speaking with local agents and brokers to help you understand the market and decipher whether or not the purchase would meet your investment needs.
With the help of a professional, you can come up with a ‘checklist’ of the property and market features required for your investment.
You may want to consult the services of the following professionals to help determine your investment strategy and borrowing capacity, as well as locate a high-growth area:
- Independent property strategist
- Mortgage broker
You should employ a team of professionals to avoid buying a property based on emotion.
Consider using a buyer’s agent to protect you, because you're going to have to pay a learning fee.
You either pay it to the market when you overpay or when you buy the wrong property, or you pay it to someone to protect you.
3. Save early
If you want to invest in property, you need to start saving as early as possible.
To bump up your savings, you may need to learn how to create a budget.
You should also get into a habit of making regular deposits into a high-interest savings account so you can show your lender that you have financial discipline.
4. Consider a family guarantee
As a rule of thumb, banks want you to come up with at least a 20% deposit of the purchase price, even though sometimes you can put less down and pay for lenders' mortgage insurance (LMI).
However, if you can’t complete a 20% deposit, you have the option of using a family guarantor.
This is where an immediate family member allows the equity in their property to be used as extra security for your home loan.
If your parents are willing and able to become the guarantor, then this can be a great solution for young investors looking to borrow with a high LVR.
If you do this, make sure you split the loan in two portions: the portion your parents are guaranteeing and well as the portion that they are not guaranteeing.
You should work on reducing the portion that your parents are guaranteeing so you can release them as soon as possible.
5. Consider borrowing options
As a young investor, you may want to consider co-borrowing, which involves two or more owners agreeing to share the costs of ownership.
This can be a good solution if you both have similar financial goals and circumstances.
Along with sharing the loan cost, the borrowers share additional costs such as stamp duty, strata fees or legal charges, as well as ongoing costs such as maintenance and repairs.
However, this also means that you’d be responsible for the other borrower’s debts if they can’t meet their repayments, so you need to make sure that legal documents are in place.
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6. Shop around for a competitive loan
The investment loan market is highly competitive and this means you can find a mortgage product with features such as an offset account, the ability to make additional repayments, a redraw facility, and minimal ongoing fees.
Sourcing a home loan with these features will mean that you can lower your mortgage repayments and interest charges so you can focus on servicing your debt and reaching your investment goals sooner.
To demonstrate, if you have a $350,000 mortgage at 5.5% interest over 30 years and you decide to start contributing an offset amount of $2,500 in the fifth year, you will save a total of $7,268.28 and chop four months off your loan term by leveraging an offset account.
Once you've found the right home loan for you, apply for pre-approval as this offers increased negotiating power when it comes to agreeing on a price with the seller or agent.
With pre-approval, you’ll be considered a preferred buyer as you have a lender’s approval already in place, which can help you win a bidding war against others who may not qualify.
In addition, pre-approval can reduce stress by speeding up the documentation process once you’ve found a property.
8. Demonstrate financial discipline
The ability to save and practice financial discipline is a crucial part of real estate investing and getting approved for finance:
It’s easy to put expenses on your credit card and take on extra debts.
So you've got to learn the three fundamental rules:
1. Spend less than you earn,
2. Save the difference, and
3. Invest the difference and keep re-investing it until you have a big enough deposit.
Learn to sacrifice and don’t borrow more than you can afford, especially in a low-interest rate environment.
When interest rates creep up, some people get caught out, so don’t bite off more than you can chew, because there are lots of hidden costs.
When you buy a property, there’s the insurance, the rates, body corporate fees, the maintenance, and the land tax.
So you’ve really got to make sure that you understand all the costs – not just the settlement costs but the ongoing costs.”
9. Plan for contingencies
You need to budget carefully to allow for contingencies associated with your income-producing asset.
For example, your tenant may lose their job and may not be able to pay rent on time, or your hot water service may blow up.
If such incidents occur, you need to ensure that you have enough funds during the interim to cover repayments and other expenses.
10. Location & property considerations
While your team of professionals will be able to help you decide on the location and property type, you should keep the following in mind.
When you buy a property there are really 3 variables:
1. Your budget - this is determined by your lender
2. Location - never compromise on this
3. The type of property you buy - I'd rather buy an apartment in a great location of that's all your budget allows, rather than a house with land in an inferior location
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