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Do you have enough money to invest in property?

December 18, 2018 8:00 am by Upside

With the recent dip in property prices in Sydney and Melbourne, and low interest rates, now’s an ideal time for beginners to invest in real estate. But what is the best way to invest in real estate, and how much do you need to get started?

With no hard-and-fast rules, it can be tough for first-time investors or new home buyers to find the right investment property advice. If you’re wondering if you have enough to invest into the property market, there are some key things to consider from a financial standpoint.

Here, we break down the different types of real estate investment strategies out there, and the costs you’ll need to consider if you’re investing in property.

RELATED: How does investment property work?

Investment property advice 101: start with your goals

Before looking into finances, it’s important to have a clear goal in mind as this will dictate which investment strategy you use and how much money you’ll need to get there.

Do you want to buy, flip, sell, or generate profit from rent? Or are you looking for a long term growth? Will this be your main investment, or are you looking to build a bigger property portfolio?

It may be cliche, but it’s important to plan, otherwise you plan to fail. Start by writing down your property investment goals for the short, mid, and long term. These will pay off plenty in the long run to help guide your future financial decisions and investments.

How much do you need for your deposit and repayments?

Although the common rule of thumb is to save up 20% of the price of a house for a deposit, it’s possible to look at how to invest in property with little money. The minimum deposit amount needed is 5% with most banks, but you’ll also need to get lenders mortgage insurance if this is the case. The cost of lenders mortgage insurance depends on the loan to value ratio on your property and the amount you’ll be borrowing, so it’s important to check this out with your bank ahead of time.

If you’re looking at having an even lower upfront cost (such as how to invest $10,000 in real estate or less), banks also have the option for parental guarantees or deposit protection bonds. You could also be eligible for one of the Australian government grants, such as the First Home Owner Grant.

When you’re weighing up costs, don’t forget to calculate stamp duty and legal fees as well (unless you’re exempt from stamp duty).

Types of real estate investment strategies: which will you choose?

It’s important to choose the right investment strategy that suits your financial situation and your goals. Again, while there’s no hard-and-fast rule around investment strategies, there are a few common techniques used by property investors: - Owning your own home. If you’re buying a home with the intention to live in it for the long term, this frees up a lot of stress that’s caused by any market fluctuations. Owning your own home typically involves holding the property for a longer time, then downsizing during retirement – which frees up a significant amount of capital. - Buy and hold. Buying and holding is one of the most popular strategies out there, and involves buying properties that will increase in value over time, then paying off mortgage with live-in tenants. As your property value increases, you can also turn this into equity for your next property.

  • Negative gearing. Negative gearing occurs when you’re making a loss on your property, most likely because your mortgage costs exceed the rental income you’re getting from your house. Negative gearing means you can claim your property as a deduction against your taxable income.
  • Positive gearing. On the flipside, positive gearing occurs when the cost of rental exceeds the cost of your mortgage repayments, so you’re making a profit on your property. If it sounds like a dream scenario, that’s because it is: the likelihood of finding a positively geared property in the majority of capital cities is highly unlikely. If you’re investing in positively geared real estate, you’ll have to do plenty of research into rental costs and mortgage repayments.
  • Flipping. Flipping essentially means you’re buying a property with the intention to renovate it and sell it at a profit. Flipping isn’t necessarily recommended in investment property tips for beginners, because plenty of hidden costs can spring up along the way – plus, you have to account for time and labour that’s invested into the property. The key to flipping is buying in a good location, getting it done quickly so you don’t lose money on the mortgage, and only investing in improvements that will add value.

Will you have to pay commissions, rental fees, or extra insurance?

After you find the ideal investment property, and have the finances to back it up, the last thing you want to be stung with is extra commission fees or ongoing rental fees that affect your yield. Rental fees can significantly impact your overall profit if you’re renting out your investment property, so be sure to include this in your financial plan.

If you’re planning to sell in the long term, you’ll have to look at capital gains tax, and real estate commission fees. The average real estate commission fee for selling is between 1.6%-2.5% (plus a whole host of other marketing and staging fees).

RELATED: How does selling a home affect my taxes?

Investing in property is a great decision and you can do it with less capital; however, getting it right involves having a long term vision, careful financial planning, and plenty of research.

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