If you already have your first property, then congratulations! You are past the hardest bit of being a property investor – getting the first property!
There is no point in trying to sugarcoat it! Buying your first property is the hardest part of property investing.
But once you have one, you can just wait for its value to rise and then use the bank’s money to buy the next, and the next, and the next. But there is no avoiding it – you simply have to find the cash to get into that first property. Either borrow it from a family member, or simply save up.
Fortunately, some banks will give you a loan of up to 95% to buy your first property, so all you need to raise is a 5% deposit and the money for stamp duty and other costs. So to buy a modest $400,000 property, you will need a $20,000 deposit plus, depending on the stamp duty for the applicable state, about another $15,000 again. So a total of $35,000.
If you don’t have that much, there is another way. You can ask your parents or another friend or relative to lend you the money.
If they have the cash, you could offer to pay it back in 5 years’ time under the assumption that at that time you would refinance your home to extract the money you owe them. The risk here of course is that you must be confident you are buying in an area where prices are growing. Otherwise, you could end up in a situation where you cannot pay them back. But we will talk about how to pick where to buy later, so you shouldn’t have to worry about that.
If you are younger and just starting out, another option may be to ask your parents to raise a small loan against their own property for the amount you require. You can then make the repayments on that loan for them in addition to the loan repayments on the loan for your new property.
In either case, most banks will still want to see some evidence of some of your own genuine savings being contributed to the purchase. Of course, you can also make use of the First Home Owners Grant (FHOG) too if you are eligible. Just keep in mind that you must live in any property that you use the FHOG for, and for a minimum of 6 or 12 months depending on the state or territory you live in.
Also, don’t rule out the option of continuing to rent and buying an investment property as your first property. Many people wait years for the opportunity to use their FHOG but miss out on far more than the value of the grant in the capital growth they could have made if they just purchased an investment property in a high-growth area as soon as they could.
Additionally, it is critical that each property you purchase grows in value in the short term if you wish to leverage off the back of it into your next property. If your first property is purchased for emotional reasons
like ‘it’s close to family’, and not investment reasons, you are putting yourself at a big disadvantage. Often it is better to rent where you want to live and invest only where it is booming!
Join me tomorrow when we look at should you rent or buy your own Home?
~Damien Patterson
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