My Property Investment Tip #21, #22, #23 & #24
How To Buy A Property With ZERO Cash (of your own)
Method 1 of 4
Most people simply write off property because they don’t think they have the cash for a deposit, but guess what? You don’t need it (most of the time).
Yes it can be done and there’s several strategies. Here is the first one:
1. Parental help. AKA the Family Guarantee. Now this is one of the reasons why it’s important to be nice to your parents! Haha. But you can actually borrow 105% of a purchase price (100% for the property + 5% for the stamp duty and other costs) if your parents are willing to guarantee the payments for you. They will need to have equity and income to prove to the bank they can handle the loan if you fall over. This is a fantastic way to help your kids get their first property! Message me if you want to explore that more.
2. First home owner grants. First home owners can borrow up to 95%. So right now in some states, with the current $15K home builder scheme on top of the FHOG and stamp duty concessions, you can pretty much get a property without your own cash. But the banks will still want to see some genuine savings (like $5K), you must build, and it can’t be too expensive.
3. Rent-To-Buy. Also known as ‘vendor finance’. Now this space needs to be carefully managed if you try it. You will need to get expert legal advice to look at your vendor finance contract, and financial advice to ensure you can afford the repayments. You should also check the laws in each state around these deals.
Basically the way it works is:
– the owner (the vendor) acts like the bank (hence vendor finance).
– You agree on a price for the property (usually slightly higher than market to compensate the vendor for taking greater risk and not getting paid in full upfront)
– You then agree on a repayment plan to pay the vendor off over time. Usually an amount higher than the rent would normally be.
– Interest is charged like a normal loan, and a ledger of repayments and interest charges is kept until the loan is cleared. Just like a normal bank loan.
– At an agreed point, the ownership of the property formally occurs at the land titles office. Usually the end of the payment plan, but can be some time along the payment plan if the other party agrees.
– If the Buyer/Renter fails to pay a payment on time, or catch it up within the agreed time frame, they forfeit ALL their payments to date, and the Vendor retains ownership of the property.
Again I must stress the importance of getting legal and financial advice before attempting this strategy.
Businesses are also often bought using this method. Often by employees buying the business off their retiring business owner/employer.
4. Use Equity! Now this is actually the easiest and most common method to use. If you already own a property that has equity (i.e. the loan is less than 80% of the value) you can use that equity to secure the next property and effectively borrow 105% of the new purchase). The best way to do this I believe, is to get a small second loan against property #1 to extract the available equity as cash, and then use that money as the deposit for property number#2, and then get a loan against property #2 for the rest of the money you require. Don’t cross collateralise if you can avoid it.
Daimien Patterson is the CEO of Integrity Property Investment, a property investment company based in Australia. He regularly produces books, blogs and videos on the topic of property investing, helping thousands of people create financial security and freedom through education and property investment. Get started today.