How millennials can break into property investment
Most millennials simply don't have the capital for a deposit on an investment property. In this article we explain the options available to young people and detail how to get a property investment loan.
Conditions Are Perfect For Millennials To Invest In Property
In our earlier article, we described the property investment opportunities for millennials and now we’ll tell you exactly how you can break into these competitive markets.
Millennials can succeed in property investment.
The key first step on your property investment journey is finance, or a property investment loan. Everyone’s financial situation is different. But it’s safe to say that most millennials, in the early stages of their work life, simply won’t have loads of capital for a deposit on an investment property. So how do you get a lender to approve a loan?
There are a few options available:
This is an excellent option providing members of your family are open to it. The benefits are: there is no money to outlay and you get to set the amount.
Essentially a family member (usually the parents) guarantee a loan to their children by putting up their family’s equity. Typically, this is the family home. This is less scary than it sounds. The property isn’t at risk. The guarantee is limited to an agreed percentage of the property. So, if the very worst happens and you can’t pay the mortgage, the banks will sell the investment property first and then the liability for the parents is limited to the percentage agreed upon.
For example, if the parents have a property valued at $1.4 million, they may decide to lend $100,000 of equity off their property to help get a deposit. So their commitment is for that $100 000 not their whole home. The bank uses that percentage of their home as security.
Importantly it reduces the borrower’s loan to value ratio (LVR). It means you can jump to the head of a queue as a borrower; you can get a mortgage without having to fully save up for the deposit.
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Also, it means you won’t have to pay mortgage insurance, which is very common for first time investors who don’t have a lot of capital. Mortgage insurance is payable when the loan is more than 80% of the purchase price. Mortgage insurance rates vary, and can easily be $10,000, $15,000 even $20,000 in some cases. So this is a big financial setback to avoid.
Another way in is to take the syndicate style and apply it to property investment. This means teaming up with one or more co-borrowers and all jointly owning a property. By pooling your resources you can get a deposit together more quickly and thus get a loan. It’s similar to the family pledge in that you’re working with a third party but there are significant drawbacks. For instance, if one of the co-borrowers circumstances change and they suddenly can’t afford the repayments, this will hurt you. Also it means you have to all agree on the direction and strategy of the investment property and there will be major problems if you’re not all on the same page. Ultimately co-borrowing can be risky and is not recommended unless you and your partners are all very clearly upfront about how you will run it and have thought through all the potential problems.
Saving up a deposit
You can save up a deposit by living with your parents. This is another way they can help you out and then you pay them minimum/nominal rent. This is a tried and tested method of getting a deposit together. It’s no wonder that HILDA recently found children living with their parents for longer. There’s many other ways to quickly save and bring in money. Cutting down on expenses like going out, buying only the essentials and then bringing in extra money by taking a second job on the weekends. Remember this is only for a short time and it’s a great way to set yourself up for life.
Once you’ve managed to get the deposit it’s then a matter of deep research. Which are the areas about to take off? Which suburbs offer that sugar hit of strong capital growth, high rental yields and yet have a low buy in? It’s finding that area that is about to take off as opposed to the area that’s already hitting its peak. It’s the Holy Grail of property investment. But remember there’s many markets right across Australia so don’t confine your search to just where you live. If you don’t feel confident in making that kind of prediction, go to professionals that can craft a strategy for you.
Bianca has been highly successful in blazing a trail into property investment.
So who’s actually made this work?
There are many stories of younger investors who’ve been highly successful in blazing a trail into property investment. Like Bianca, a single young woman, who made the plunge into buying an investment property in south west Sydney and is now making a positive rental yield of $890 per week, whilst enjoying capital growth of over $180,000 in the three years she’s owned it.
Or young couple, Caleb and Ruth. Both young working professionals with steady incomes and a two year old son. Yet Sydney property ownership seemed well and truly out of their grasp. After they came to DPN they went down the path of getting a family pledge to get into property investment. They managed to buy land in Gregory Hills. This they then built two houses on, using DPN’s Dual Income property. They plan to live in the two bedroom house and rent out the 4 bedroom. The rent from the 4 bedroom will pay most of their holding costs, meaning they are paying well below market rates for a new 2 bedroom house. Most vitally they are now definitely in the Sydney property market.
These are just some success stories of young investors. We hope we can help you write yours.