Lewis Isaacs is an author from Domain.com.au – he shared his advice for anyone considering becoming an investor.
Buying your first property is hard, and slow wage growth and rising real estate prices in capital cities have only made it harder.
Few are feeling the pinch more than Gen Y, who, as relative newcomers to the workforce, may face the prospect of being priced out of the market in suburbs where they currently live.
Rentvesting – where you continue to rent where you want to live after purchasing an investment property in a more affordable area – was how I managed to get a few toes on the ladder.
With an investment property, a tenant helps pay the mortgage and there are a number of tax incentives to offset a few of the costs. It also means your investment moves at the same rate as the housing market instead of sitting in a bank.
But despite the benefits, it’s not quite so simple. Here’s what I wish I knew before taking the plunge.
Depending on your property and the size of your deposit, it’s likely there will be a shortfall between rental income and loan repayments.
In my case, there was a difference of $85 per week, which sounds manageable, but when you factor in the additional costs of ownership, the repayment gap widens.
Management and strata fees, council rates, water bills and insurance appear regularly for as long as you own the property. Even the intermittent repair bill is to be expected. Over the first two years, the income covered just half of the repayments before tax.
Those aren’t hidden costs but are often overlooked when applying and budgeting for the purchase, especially if you’re going to keep renting.
More is definitely more when it comes to saving for a house deposit, but one of the myths I encountered early was the requirement for 20 percent.
According to census data from 2016, the average Australian between the age of 21-34 takes home $1,076.60 in cash every week. A 20 percent deposit on a $500,000 purchase would require $100,000 upfront. Even if you saved half of your income every week it would take four years to reach that figure.
You could spend another year saving $25,000 as you watch the value of property increase by much more.
Or, you could negotiate with a bank to lend more than 80 percent of a property’s value. You may incur a Lenders Mortgage Insurance cost – a security fee the bank charges you to cover the higher risk loan – which can then be added to the total loan value.
I started with a deposit that was closer to 10 percent than 20 and bought an affordable property outside a capital city. Borrowing below the maximum the bank would lend me gave me room to move financially and ensured the purchase was well within my means.
You can expect to pay a higher interest rate as an investor, but the wide range of lenders allows you to find the best deal for yourself.
After speaking with an accountant and mortgage broker, I was able to compare loans before purchase and renegotiate the interest rate after two years.
With interest rates falling 0.75 of a percentage point since my purchase, I have been able to split part of my loan to a lower fixed rate, bringing down my weekly repayments and the overall interest charged.
It’s a fact of life, nothing lasts forever, and this applies to property too. Wear and tear, accidents and routine repairs are inevitable.
That’s not always a bad thing, as repairs are tax-deductible, and keeping a good tenant happy is a worthwhile investment.
Repairs are also a potential opportunity to freshen up the property and increase its value, so don’t scoff when a bill comes in.
There’s no point in sugar-coating it, homeownership has not been easy, and paying off a mortgage while simultaneously paying rent can carry a heavy strain.
Working to save for a deposit took me a few years of freelance work on top of my day job and a reasonably frugal lifestyle. Ownership has required much of the same.
But there have been many upsides. In three years, the property has risen in value, and improvements have increased the rental income. The benefits of the offset account are starting to take effect, and the impact on my personal finances has diminished. My increased equity and the knowledge I’ve learned along the way have also set me up to take the next step.
I started small, it was still hard, but it’s made that dream of sleeping in a place that’s my own ever so slightly closer.
Lewis Isaacs bought his first investment property in 2015 and is currently renting in Sydney while he saves to buy a home to live in.
Article originally authored by Lewis Isaacs from Domain.com.au