Making your first property purchase can be a daunting experience, especially for young investors struggling to secure their first loan in an increasingly competitive environment.
Blogger: Troy Gunasekera, national manager, The Property Club
I believe that many young investors can be successful as long as they commit to getting their finances in order, do their research and develop the right mindset prior to applying for a loan.
Young investors often mistakenly think that purchasing a property is a matter of selecting one you like, purchasing it and then watching the dollars roll into their bank account.
However, what they often don’t realise is if they fail to adequately prepare before applying for a loan they will have a tough time getting any further – especially if they don’t have a clean credit record due to a history of not paying bills on time.
Even if you secure a loan to purchase your first property, it’s important to ensure you can keep on top of loan repayments, either by purchasing a property that will likely generate positive rental yields or otherwise be in a position to cover loan costs not covered by income rent.
Here are my eight tips for young investors:
1) Develop the right mindset. Many young, first-time investors want to get rich straight away and don’t think of property as a long term commitment. Start thinking about your long-term financial independence and consider a 10 or even 20 year investment plan. Also, talking with others who invested in property at a young age will give you a more realistic view of the financial journey, what sacrifices you need to make and the rewards.
2) Keep a good credit record. While it may be common practice to pay bills past their due date and have some personal debt while you’re still young, this won’t do you any favours when trying to purchase an investment property. Recent changes to Australia’s credit reporting system mean that if you miss a bill payment – even by less than one week – it’ll be recorded on your credit report. Consequently, you may be at a disadvantage as it gives the impression to lenders that you’re likely to miss payments in the future.
3) Understand tax. If you’ve decided to purchase an investment property, now is the time to get serious about your taxes. Seek specific, tailored advice for your personal circumstance and make sure to choose an accountant who specialises in property tax, as they will ensure your investment is as financially profitable as it can be. For example, many first time investors would be unaware that travel and accommodation expenses incurred to inspect or maintain your rental property are generally tax deductable.
4) Make a habit of saving. Although saving may seem like an impossible task while you’re young and starting out, lenders look for evidence of consistent savings over time, so it’s important to start now. Get into good savings habits from an early age by putting aside a select amount of money from any working income each week – and make sure you stick to it no matter what. To meet lenders guidelines you’ll generally need to show savings of 5 per cent of your purchase price over a minimum of three months.
5) Lean on your parents. In such an increasingly competitive market, many young home buyers are using the parental guarantor system to secure an investment property where the 20 per cent deposit toward their purchase is held against their parents’ home asset. When your repayments against the loan have covered the 20 per cent holding, the guarantor can then be released and the loan will be solely under your name.
6) Develop a strategy before purchasing. Developing an investment strategy is an extremely important component many young investors fail to apply. You can’t simply purchase an investment property, throw it in the bottom cupboard and then forget about it. You need to develop a detailed strategy about the type of property you want, how much money you’re going to spend, what your expectations are and what your net position will be after you have settled on a property.
7) Learn to negotiate. Many young investors lack the ability to negotiate a property’s price or take a stance with a builder. It takes a lot of confidence to be able to negotiate a price, but if you can you have a much better chance of getting a better deal not only with the property itself, but with any renovations or work that needs to be done in the future.
8) Take advantage of growth cycles. The more time you spend in the market, the more profitable your asset becomes. If you invest young, you have the luxury of sitting out any market downturns, and witness the value hike of numerous growth cycles before it’s time to cash in. Historically house prices have doubled in around 7 – 10 years, so leaving time for that second or third growth cycle can make a huge difference to your investment.
About Troy Gunaskera
Troy Gunasekera is the national manager of The Property Club, Australia’s largest independent property group guiding members of all ages to become financially independent through investing in property.
With his wife, Troy has an impressive portfolio of properties worth over $5 million diversified across Australia. His own investments are the result of his continual research into the latest developments in property finance, interest rates and property markets Australia wide.