By Philippe Brach, CEO, Multifocus Properties & Finance
Typically, young investors face unique challenges simply because they have not benefited from the key element that makes a property investor wealthy: TIME. By this I mean time to be professionally settled in, time to accumulate some savings, time to know where they are heading in life. It is all a work in progress. Some lucky ones already have a deposit in place, due to inheritance or good fortune, and this is a great head start.
So how do we overcome the issues to give young investors the best possible start in their investment careers?
Firstly, it is all about planning. A good advisor will be able to help put together a strategy going forward and provide the necessary education needed for an investor to understand the ins and outs of property investing and make informed decisions. If you know what you need to do to be in a position to acquire your first investment property, then you can work towards this goal. Choices need to be canvassed around the type of strategy an investor wants to use; buy new as a passive investment or buy old and renovate for example. Long term targets will help the investor have a clear vision of what the end position will be and clarity of thought will be the motivator going forward. So education and planning is the first step.
The next task consists of working out what the boundaries are. For example, borrowing capacity is critical to obtaining finance from a lender. If the capacity to borrow sufficient funds is an issue, then it is important to work out what needs to be done to improve it, i.e. how much more income does the investor need to be in a position to borrow safely. Keep in mind there is also the option of investing with a family member or partner.
Another boundary involves how much is available for a deposit. For example an investor needs about $70K as a minimum to acquire a $450,000 property when borrowing 90% from a lender (this includes mortgage insurance to be paid to the lender, so the actual loan to value ratio is about 88%). The investor could work towards saving the deposit through a savings plan. A good mortgage broker should be able to advise if the leverage is making the loan too risky for a particular person.
Another common way to get into property is if there is a family member willing to help financially, or even by providing a “family pledge”. This involves parents securing up to 20% of a loan for their offspring. There needs to be a strong bond within the family, but these types of loans are available at no extra premium compared to normal loans.
The hardest and slowest part of any strategy is always the acquisition of the first property. It takes a lot of effort scraping a deposit together and getting approval from a bank. Once this is done, then it will usually take time again to get to the next one, as the first property needs to grow in value so that equity can be used in conjunction with new savings to acquire the next one. The pace starts picking up once the investor has 2 properties growing in value, and hopefully he/she will have a better paid job and increased savings. So, like all investment strategies, time is needed to get some traction.
I am really excited when young investors come to me to talk about property, even if they are not quite ready, as they have the right attitude to getting an early start on wealthy creation and securing their future. Compounding is the magic ingredient that will allow leverage to create wealth, so the earlier anyone starts in property the better. All it takes is a conversation with a good professional.