Deposit and finance options
With plenty of funding options available, it pays to explore a number of strategies that could help finance your investment property.
It can make sense to put savings to work as a buying deposit. But how much cash will you really need? The answer varies between lenders. Some banks may only want to see a deposit of 10% or even as little as 5%. However, if your deposit is less than 20% of the purchase price, you can expect to pay lenders mortgage insurance.
Remember, buying a rental property also involves upfront costs such as legal fees and stamp duty. It is a good idea to plan and budget for these upfront costs so you’re prepared when the time comes.
If you have funds tied up in other investments, or you simply want to preserve cash savings, it may be possible to use the equity in your home or another property in lieu of a cash deposit.
Equity is the difference between your home’s market value and the balance owing on your home loan. If your home is worth $500,000 for example, and there’s a balance of $200,000 on your mortgage, you have equity of $300,000. This money can be used to provide additional security on an investment property though lenders will also consider other factors including your income and living expenses to decide exactly how much equity can go towards your property purchase.
Inheritance and gifted deposits
An inheritance or cash gift can go a long way to funding a rental investment. Nonetheless, banks still want to be sure you can manage the loan repayments, and to do this they often look for evidence of regular saving. How much you need varies, generally, most lenders like to see six months of savings.
It may be possible to buy an investment property through a trust. This type of structure can be hard to get your head around, but they’re not always as complicated as they sound.
In simple terms, a trust lets a group of people known as ‘beneficiaries’ have an interest in the assets held by the trust. A trustee is appointed to manage these assets, and the beneficiaries receive any income earned by the trust.
Several main types of trusts are available including ‘family discretionary trusts’, which can be popular among property investors. The appeal lies in the way the trustee can divide the trust’s income between different family members. It can be a way to take advantage of the different personal tax rates of family members, and thereby save on tax.
The downside of trusts is that they cost money to set up and maintain, and you need to be sure the benefits outweigh the expense.
Trusts can have other drawbacks for property investors. Any losses made by the trust can’t normally be passed on to the beneficiaries – something worth noting if you plan to negatively gear a property. Even where a bank is willing to lend funds to a trust, conditions may be imposed such as asking each of the beneficiaries to act as guarantor for the loan.
The bottom line is to speak with your tax professional and solicitor about whether a trust is the right way for you to finance an investment property.
Investing with low to no income
Even if you earn little to no income, it may be possible to finance an investment property because individual lenders each have their own criteria to determine eligibility for a loan. Even so, lenders will look closely at your income to be confident that you can keep up the repayments.
On the plus side, wage and salary payments aren’t the only types of income that lenders consider. Property rent, regular government benefits, and dividends may also be acceptable forms of income.
One of the primary ‘X’ factors for low income earners can be how much you have in genuine savings. Lenders like to see that you have built up a pool of savings as it shows you have the financial discipline to handle a loan. Other factors that can help your loan application over the line include having a low level of personal debt and staying on top of regular household bills.
Meeting with your Aussie Broker at an early stage can give you a better idea of whether you’re likely to be approved for an investment loan even if you’re a low or no income earner.
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- Chapter One : Things to consider before investing in property
- Chapter Two : Determining where to invest
- Chapter Three : Investment properties by dwelling types
- Chapter Four : Finance for your investment property purchase
- Chapter Five : How to invest in property
- Chapter Six : Adding value to your investment property
- Chapter Seven : Positive and negative gearing
- Chapter Eight : Getting your loan
- Chapter Nine : Selling your investment property