It's not surprising that we are contacted increasingly more often by people who are looking at investing in property for the first time. They are not the young investors, with a few years in the workforce and looking at getting ahead in life. They are professional people, a bit older, earning a good wage, but have little savings because of the cost of living. What's driving them to seek advice on investing in property?
A combination of lower interest rates, a general sentiment that the gloom is lifting and the future is brighter is spurring them into exploring options. It is also fair to add that there is a sense that one has to “do something” as traditional super accumulation looks unlikely to be the retirement solution it was once touted to be. As an empiric observation, most of the people on our database have substantially too little in their super to give them any decent lifestyle when they retire.
Borrowing capacity for this investor profile is typically good enough for one or two investment properties with a value of around $500K. Although this typical investor has great borrowing capacity, he/she has little cash for an initial deposit and to pay for stamp duty, legal costs, etc. It’s important to understand why a person with this level of income has so little savings, and most of the answers we get revolve around personal or family issues such as divorce, kids, etc. Very few blame their lack of savings on poor financial discipline.
The first step is to set up a plan to build up their savings. Typically, a minimum of $70K-$80K is required to start investing in a property. This is based on borrowing 88% of the target property price, which is the maximum banks will lend for an investment property.
For such an investor, once the savings target has been achieved, we would source a house and land package property because there is a massive saving to stamp duty, which is payable on land only, not the building. On an average $450K property, this saving can be $12K to $15K. When you have a small deposit this is a substantial saving. We should mention that when investing in such a product, the investor acquires the land first, and then construction starts. It typically takes 7 to 8 months to build the property and progress payments will need to be paid to the builder. So there will be interest to pay from the day the land settles until the construction is finished, without having a tenant contributing towards it. This can add up to $6K to $8K interest to this typical property scenario, but is paid over the construction period. As the investor has a good income he/she should be able to service it from earnings.
It’s essential to stress that while setting up a strategy and going forward with a first acquisition it is paramount that the investor keeps savings to build a buffer, just in case.
Finally, we would recommend that the investor obtains income protection insurance and life insurance as part of a risk management strategy.
In conclusion, investing in property for the first time requires careful planning and mentoring to ensure that investors keep within safe limits, practice risk management techniques and don’t end up stretching their finances.