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Low income no impediment to property investing

29/03/2011

Well considered property investment is a great vehicle for long-term wealth creation – and you don’t have to be wealthy to get started.

According to Smartline Personal Mortgage Advisers, those on what is considered a low income still have the scope to invest in property by doing their homework and thinking creatively.

Smartline Managing Director Chris Acret said that the choice of property is critical for those investing on a low income.

“The best type of properties for the low income investor will be those that are at the lower end of the scale in price but with high rental returns,” he said.

“This will probably mean looking to the outlying suburbs of the major capital cities and to regional areas, such as mining towns. You should probably be looking at properties that are priced at $250,000 or less.” 

Acret says a low income investor probably isn’t going to be in a position to be able to fund any shortfall, so negatively geared property isn’t going to be a good option – ideally it will need to be neutrally or positively geared.

With interest rates at around 7%, that means looking for a yield of around 8-9%. If you had a $250,000 property that means renting it out for about $380 per week. While that is a big ask, it’s certainly not impossible, particularly in areas such as mining towns.

“As with all aspects of property investing, it’s critical to do your homework on the best way to finance your planned property purchase and get the best deal possible,” Mr Acret said.

In terms of borrowing, Acret says the good news for low income investors is that greater competition was now returning to the mortgage market post-GFC.

He said that while it was difficult to borrow more than 90% of a property’s value during the GFC, in recent months many lenders had announced they would now lend up to 95%.

“The key is not to let a low income deter you from investing,” he said.

“Plenty of people with a minimal income have gone down this path by thinking ‘outside the square’ as to how they can make it happen.

“See if you have family and friends who might like to invest with you, or maybe your parents are prepared to act as guarantor to get you started – there are options.”

Mr Acret says the first couple of years of owning a property could be the toughest, particularly if there was any shortfall in the income and expenses.

“However, it should then start to get easier as rents regularly increase and any gap starts to decrease, to the point where it then should be at least neutrally geared,” he said.

“Once you can get the property to that stage, you then have the opportunity to consider buying your next investment property and accelerating your wealth creation.”

Acret says first-time investors should also keep the following in mind:

  • Consider the scope for depreciation, which could total thousands of dollars a year and make the difference between the property being negatively or neutrally geared.
  • Applying to the ATO for a tax adjustment at the beginning of each financial year might make funding the property more manageable. For example, if your initial calculations indicate that you would receive a tax refund of about $3000 on your investment property at the end of the year, a tax adjustment will mean that your employer will take $60 a week less tax out of your pay, which could make the difference between being able to afford the property or not.
  • Consider looking at Terry Ryder’s Cheapies with Prospects report or reports by Residex on where to find affordable and budget properties in Australia and those areas that provide the best rental returns.
  • Repayments on your investment property loan should be interest only (as they are about 25% less than principal and interest repayments), minimising the amount required for loan repayments and maximising the chance of the property being neutrally or positively geared.

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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