How to Invest in Property with No Money
Believe it or not, you can actually invest in property with little to no money if you're sensible and have done thorough research.
We should mention that these scenarios are very case-specific and will not apply to everyone, but if you happen to mirror some of the situations that we are about to explain, you will be well on your way to property investment on a budget. We’ll also look at what is required for those on a low-income to secure a property loan.
Urban.com.au has updated this guide for 2020.
Existing equity
If you are in a situation where you already own a home or investment property, you can use the existing equity to borrow against, using those funds to finance a new deposit. This is perfect for homeowners who are thinking of branching out to build their portfolio and include a rental.
Accessing equity works in place of you needing to have the actual savings, and as a bonus, the equity will grow faster with more properties, which mean more capital growth. This turns into somewhat of a snowball as the more equity you can access, the easier it is to build your property portfolio.
It is, however, important to note that this common strategy also creates a higher level of risk. While property investors grow their portfolios using equity, so they don't have to cough up any savings, they are at a higher risk of default. Many people also feel that this strategy keeps house prices high as people borrow on top of wealth made during a boom.
Use a guarantor
The first point is all well and good if you already have a foot in the property door, but what if you don't?
Another method for how to invest in property with low income is a guarantor loan which helps increase how much you can borrow. Some financial institutions will offer guarantor loans in cases where a friend or a family member will guarantee a percentage of the mortgage on your behalf. They don't even need to guarantee the full loan, which is less risk for them.
Most banks and other lenders will allow the guarantor to cover a certain percentage of the loan. In an ideal situation, the 80% LVR (Loan to Valuation Ratio) sits with you, and the remaining 20% is secured in cash or through the guarantor loan. This means that in some instances approved by the bank, you can use a guarantor to cover the bits you don't have.
You can also remove the guarantor once you have enough of your own funds or equity to cover the debt, meaning your friend or family member only has to be involved for a shorter period.
Seller finance
Before getting too excited about this option, be wary that it is legal in Australia but uncommon. Seller finance is an agreement between the seller of the property and you, where you take a loan with the owner rather than a bank.
Why do this? It saves you needing a deposit. Basically, you agree to pay full price for the property with interest on an ongoing basis and negate the need to have the funds upfront for a deposit.
This is obviously something that benefits the buyer and the seller as they are receiving full price for their property plus interest and you are negating the need for savings upfront. Keep in mind that sellers may charge steep interest rates and there is no cap or authority governing the loan. Seller is high risk but it offers a chance to get in on a property with a deposit, or when the bank will not approve a loan. If you are able to find yourself where this is on the table, it could work to your favour.
Property options
Even rarer than the last point if the process of property options. The idea here is approaching the owner of a property with an amount that you are willing to pay for the option to purchase the property.
Why? The agreement allows you to purchase the property at a lower price if it goes up in value, making a loan for the purchase amount more attainable due to a higher property valuation. As this is more complicated than a standard purchase, you will need to work with a lender who understands these agreements and is willing to base the loan on the valuation, not the purchase price.
Partnership agreements
Much like getting a financier for a business idea, you could organise a partnership who has the deposit and is willing to foot the bill in exchange for you doing the legwork. This may only provide you will a smaller ownership percentage of the property, but it's a start and a good way to become an owner without the need for the cash.
This works well for those who are money-rich and time-poor that want to invest in property and essentially pay someone else with a share of the property to run the process for them. Property purchase, along with research into new developments to find the right investment, takes a significant amount of time. You may even negotiate them paying the deposit in return for your work organising the purchase, help finance the property with your wage giving you a 50% stake.
You will need to consider the legal requirements involved in this, preferably seeking the help of a professional legal advisor, so it is very clear how profits and losses will be split.
Qualifying for a mortgage on low-income
There isn't a specific amount you need to earn to qualify for a mortgage as the lending criteria and serviceability models vary with every institution. There are a range of calculators online that will help give you a guide to how much you may be able to afford to borrow.
Your income is one of the most crucial factors in this process as it determines your capacity to make the necessary payments, with loans, expenses, and debts taking into account along with your saving patterns.
Your income sources will include not only your primary wage, but also rental income from an investment property, government benefits, or dividends from other sources. With all of this, the financial institution will estimate an amount for your income in conjunction with your loan repayments and other expenses to determine the amount of money they are willing to lend.
Taking all of this into account, the following criteria is vital for low-income earners who are looking to buy property:
1. Evidence of "genuine savings"
2. A deposit of 10-20%
3. A proposed investment purchase of a viable investment (preferably in a location with predicted capital growth, demand, and high rental yield)
This last point is vital as your potential property needs to be marketable in case it needs to be repossessed and sold. If you are looking at purchasing for an investment, provide the lender with an investment strategy after you have spoken with an accountant and a financial planner to ensure you are making a sound investment. A benefit for you here is that estimated rental income is taken into account when calculating your borrowing capacity. Properties with a high yield help your ability to service the loan.
Figuring out how to invest in property with little money
If you are looking at taking your first dive into the property market, it can be challenging to know how much you should spend on your first property. This can be even harder if you have low income or limited savings, and hopefully, some of the information above will help you make some headway into what could be a fruitful investment plan for your future. Keep in mind the level of risk in each strategy and ensure that it is worth it.
The main thing to keep in mind is not to overcommit financially purely for the sake of owning property. In some cases it may be better to wait until you have a little more collateral to ensure that you don't end up in a dangerous situation which can put you in a financial hole, creating a situation that is the opposite of what you were hoping to achieve. Be smart, consult some professionals in regards to your finances, and make sure that the steps you take into the world of property will benefit your situation.
