You might think that property investing is reserved only for the middle-aged or the super-wealthy (or both), but the truth is...not that.
Recent stats show 51% of all property investors are actually under 50, while various recent studies from Propertyology show anywhere between 6% and 15% are under 30. What's more is 90% of Australia's 2+ million property investors hold just the one or two properties, not the 20 you might be picturing.
While young investors might be the minority, that doesn't make investing in property while young impossible. Here are seven tips for investing in property while young.
Investing in other asset classes (like shares or bonds) can be done at the click of a button these days, but property investment is a long-term investment strategy. It's not a get rich quick scheme - profiting off a property investment can take years. So ask yourself: am I prepared to commit financially over a long period of time? Do I have the patience for it? And do I have the organisational and time-management skills to actually properly manage an investment property...
If you decide to outsource much of the day-to-day running of the property to a property manager, then you generally won't have too much to worry about, especially if you pick a good one. If you decide to do it yourself, there will be repairs and maintenance involved, as well as keeping your tenants happy. Also, make sure you have some money allotted for those repairs and maintenance, such as fixing floorboards, repainting walls or renovating an old kitchen. Fortunately, many investment expenses like these are tax-deductible.
Property investment does have its advantages:
It has a high potential for capital growth
You can earn a rental income to supplement your other income
It's a physical asset that you can even use yourself in the future
You can outsource the expertise to property experts (like buyer's agent)
Many property investment expenses are tax-deductible, such as management and maintenance costs, interest on your loan repayments, loan fees and depreciation
Like all investment strategies, there are risks to consider:
Your rental income might not cover your expenses to start with
There are also high entry and exit costs
You won't receive a rental income when you have tenant vacancies
There are many factors that can affect property value
Doing your research beforehand (or relying on someone else who can do this) can help you mitigate risks.
Demonstrating financial discipline in the months leading up to a home loan is crucial. Having genuine savings built-up yourself (not given to you) will improve your chances of getting approved for a home loan as it means you have funds you can rely on in an emergency or if something happens to one of your tenants and they're unable to pay their rent. Landlord insurance often covers this.
You'll also need to be good and not spending more than you earn because property investment isn't a one-off purchase. There are extra costs outside of the home loan itself, such as insurance, maintenance, body corporate fees, council rates, land tax, and potentially Lenders Mortgage Insurance...
A deposit of at least 20% on a home loan is generally advised as you'll be avoiding paying Lenders Mortgage Insurance (LMI) on the loan, which is usually a one-off payment of thousands of dollars. Not only can you avoid LMI, but a deposit of 20% or greater can also result in being taken more seriously as a borrower and also means you'll pay less overall over the course of the loan since interest is being charged on a smaller amount.
If you have to go below 20%, then look for a competitive-rate loan that allows a deposit of 10%, or consider using a family guarantor, which involves an immediate family member using the equity in their own home as security on the loan. A guarantor might also let you avoid LMI.
If you want to reduce your repayments to begin with, an interest-only loan is a common way to do this among investors. This is because the interest component of your loan repayments is tax-deductible as an investment expense.
For young investors starting out, interest-only loans can be a good option, as long as you're confident of your ability to repay the full loan. Remember, although interest-only loans will reduce your repayments in the short term, they will actually increase the total amount you pay over the full term of the loan because your repayments will be higher after the interest-only period ends. Check out some of loans.com.au's interest-only investment loans here.
Finally, arguably the most important takeaway for any would-be investor, young or old, is to find a good value investment loan.
A home loan is likely to be your biggest ever expense, costing you hundreds of thousands of dollars over a 20-30 year period. Even something small like a 0.50% p.a. difference in interest rates can still see you pay tens of thousands of dollars more over a loan's life.
Make sure you check out some of loans.com.au's competitively-rated investment home loans to help kickstart your investment property portfolio.