With inflated prices and tighter lending, the hurdles first-time investors have to jump are getting higher. Thom Richards chats with Effie Nicol from Yellow Brick Road about some options for those looking to kick off their investment portfolio.
TR - I have always been a big advocate of brokers, they generally have access to a wide range of products, understand the lending space, stay up to date with trends, understand the bank’s requirements plus have a huge incentive to help you get from approval to settlement in that they will not get paid if you don’t!
Effie, let’s start with the basics. What are the main factors preventing a young property investor from getting their foot in the door?
EN - The major barrier for anyone getting into the property market, not just investors, is the high property values we’re seeing. I just saw an article that said it takes Sydney first-home buyers an average of 8 years to save up for a deposit. And saving up for a deposit can be harder if you’re an investor because you might only have the one income to rely on, unlike couples who are probably looking for a home to live in.
Another factor is affordability, when you’re buying an investment property you have to have enough income coming in to cover your own mortgage/living expenses plus the additional costs associated with the investment such as the second mortgage, property management fees and maintenance etc. That’s just not achievable for a lot of people.
Many of the new buyers that I see are really set on purchasing a property in a particular area that is close to where they currently live or where they would like to live. They have an unrealistic view of what they can actually afford or how much an investment property in their dream location could potentially yield. Remember when purchasing an investment, it’s not about buying your dream property to live in.
TR - Ok, so let’s looks at ways around these barriers as most prospective investors will need to address these before they can even consider looking at structures, properties & mortgage products.
I remember the biggest issue was not being able to pull together a deposit. Saving a decent deposit is near impossible when paying premium rents and living in an expensive city. What are the best ways for a young professional to either seek help from their family, tap into their super early or even seek a higher LVR in order to secure their first property?
EN - I agree that saving for a deposit is hard, I do work with a lot of clients who don’t have the luxury of parents or other family to help them and we’ve been able to get them into the market in a few years. It’s all about setting a budget, staying focused and managing expectations. You might need to cut back on nights out or some of those ‘nice to haves’ it is absolutely worth it in the long run.
That said, there are two options available, your parents can provide you with a non-refundable gift which you can use towards your deposit or they can go guarantor on your loan. By providing a guarantee on the loan, their property is used as additional security for the borrowed amount. There are risks involved in this strategy so these need to be considered carefully by all before you commit to anything.
A high loan to property value (LVR) loan is an alternative for people who have a smaller deposit saved. There may be additional criteria you need to meet to qualify for a high LVR loan, such as a clear credit history and minimal other debt. You do still need to have some savings put aside for the deposit however not all lenders will let you borrow using a higher LVR for an investment property.
You might have heard about the Government’s proposal to allow first home buyers to use their superannuation to build up a deposit. Unfortunately, this still hasn’t been made law so at this stage it is not an option. Even if it does come into play, it looks as though you would have to live in the property for at least 6 months in order to qualify, so it doesn’t really suit investors. The other option in relation to super is to purchase an investment property through a (SMSF) self-managed super fund. To set up this kind of arrangement you need around $200,000 to make it worthwhile however as this is a complex vehicle to run so I would strongly recommend getting professional financial advice before heading down this path.
TR - So once they solve this deposit issue, they still need to satisfy the lender that they’re buying the right property and the right price & can continue to service the loan.
What are some red flags for lenders when it comes to first-time investors and how can they be avoided?
EN - Banks and other lenders have become increasingly more cautious about loaning money for investment properties so there are more checks in place now than before.
Probably the biggest red flag for a lender is your employment history. If you have only been in your current job for a short time, or have switched fields often in the last few years, the lender may view you as too much of a risk.
A low credit score is also going to really limit your options. Banks don’t want to lend to someone who has a poor track record of paying off debt. There are things you can do to improve your score, I would definitely recommend consulting with an expert before you do anything.
Gather your paperwork together before you apply. Every lender has their own checklist of documentation that they require for a loan application. Some documents may take longer than others to round up and you might need very specific things (paper statements not internet printouts for example) so it’s definitely worth taking the time to pull everything together before you lodge your application.
Last but most important I’d say get pre-approved for your loan. Obtain Pre-approval in writing, this will not only give you more power to negotiate with the seller, it will also mean you know exactly how much you can spend.
TR - As investment loans are generally different to owner-occupier loans, are there certain properties that are more appealing to lenders as investments?
Every lender is different and every application will be viewed on its individual merits. However, there are some things to watch out for, like the size of the property, its location and its condition.
It might surprise you, but small studio apartments can be a ‘turn-off’ for lenders, because they are not as appealing to long-term renters. Smaller properties may also not be a good investment because some banks won’t let you use the equity to purchase more property.
Location is everything in real estate. As I said before, people often fall in love with an area and end up paying more for something than they can actually afford. Property in a bad location is also risky. Property values may be trending down due to crime or poor infrastructure, or there may just be an oversupply of similar apartments in the area.
Condition is also a key factor. If repairs need to be carried out, you not only have to pay for them but also risk losing income while they’re carried out. Older properties can have hidden problems, so a condition report is an absolute must. Buying off the plan can also have its issues as the property can’t be valued until it is complete and with the speed some buildings go up it’s not surprising that builders have been known to cut corners and values can be less than what you agreed to pay for them putting risks into the borrowing against that property.
It all comes down to taking your time and researching your purchase to ensure it’s a good investment.
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