You don’t have to be a millionaire to have your own investment property portfolio. Here’s how to build a property portfolio, even with limited cash.
With two investment properties under my belt, I am living, breathing proof that you don’t need to be a millionaire to have an investment property portfolio.
While you do need some cash to get you started, there are some ways to get a foot in the property market that you mightn’t have considered.
Save a deposit
When you’re buying an investment property (or even investing in a commercial propety) it’s important to show the lender that you can save, not to mention have some cash for a deposit to increase your chances of having a home loan approved.
Interest only repayments
Interest only home loans mean you only pay the interest on your loan for a specified period without paying down any of the principal loan amount. Intended specifically for people buying an investment property, interest-only loans reduce your loan repayments. The rental return on investment property may then pay or come close to paying the mortgage, leaving you less out of pocket and able to service the loan.
Tap into equity
If you’re in te property market already and own a home you may have equity that can be used, not as a deposit but as a guarantee. By using your home’s equity you may be able to borrow more than 80% of the investment property value, without needing to pay Lenders Mortgage Insurance (LMI), potentially saving you thousands of dollars. To work out your home equity, calculate the property value less 20%, then deduct the debt owed on it.
Use a guarantor
If you have family members willing and in a position to assist, a using a guarantor when buying an investment property can definitely help you build your investment property portfolio sooner. A guarantee is when a family member – typically parents, parents-in-law or step parents of the borrowers – uses the equity in their own property as additional security for a portion of your investment property loan amount, helping you to avoid LMI if you don’t have a 20% deposit saved. Guarantors don’t have to secure the whole investment property loan, just whatever portion is needed.
Consider buying off the plan
While there are pros and cons to buying off the plan to get into the property market, one major benefit is that typically a 10% deposit is all that’s needed to buy an off the plan property. The rest won’t be due until settlement when the property has been built – which could be a couple of years down the track! This will give you time to get the remainder of your finances in order, or save more money so you can get a smaller home loan to finance your investment property. If you buy off the plan, you might also be eligible for a government grant: Check your state or territory government’s website to find more info.
When buying an investment property, if you borrow more than 80% of a property value you’ll most likely need to pay LMI. This can cost thousands depending on the size of your loan. Some lenders may let you capitalise LMI, which means it doesn’t have to be paid as a separate lump sum. Instead, LMI is incorporated into your overall loan amount. While this reduces your upfront costs it will increase your monthly repayments, so make sure you can afford the repayments.
Buy an investment property with a friend
Do you have a family member or close friend who’s also keen to enter the property market and create an investment property portfolio with you? Going halves or thirds with someone else makes it more affordable because you only need to pay your share of the deposit. After all, owning 50% of something is better than owning 100% of nothing (Tweet this!). Just make sure you have a solid contract drawn up to help avoid future disputes.
Buying an investment property on a small budget? Tell us how you’re building an investment property portfolio in the comments below.
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