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Young investors face a unique set of challenges, but it's still possible for you to get a head start on your wealth creation.
Blogger: Philippe Brach, CEO, Multifocus Properties & Finance
To create wealth, the four ingredients are strategy, leverage, action and time. Typically, young investors face unique challenges simply because they have not benefited from the key element that makes a property investor seriously wealthy: time. Time to be settled in professionally; time to accumulate some savings; time to know where they are heading in life.
How do we overcome these issues to get young investors the best possible start in their investment careers?
First, it is all about planning. A good adviser will be able to help put together a strategy and provide the necessary education for an investor to understand the ins and outs of property investing and make informed decisions. If you know what you need to do to be in a position to acquire your first investment property, then you can work towards this goal.
Young investors also need to canvass their options and decide which strategy will work best for them. For example, buy new as a passive investment; or buy old and renovate?
The next step consists of establishing boundaries, such as how much you can borrow. Usually this is not an issue, as lenders will lend even on a modest salary. Anyone on $50,000 a year paying $300 a week rent with no other liability can borrow about $350,000. However, if it is an issue, then it is important to work out what needs to be done to increase this borrowing capacity – how much more income the investor needs to have to be in a position to borrow safely. There is also the option of investing with a family member or partner.
Other boundaries can arise when it comes to how much is available for a deposit. For example, an investor needs about $50,000 to acquire a $400,000 property with a 90 per cent loan. This investor can work towards saving the deposit through a savings plan. An investor would need about $30,000 if the loan-to-value ratio (LVR) was 95 per cent – but at these levels obtaining a loan is touch-and-go, as the asset position of the applicant does not look strong. A good mortgage broker should be able to advise if the leverage is making the loan too risky for a particular person.
An alternative strategy for getting into the property market is taking advantage of a family member who is willing to help financially, possibly using a family pledge. This involves parents securing up to 20 per cent of a loan for their offspring. There needs to be a strong bond within the family, but these types of loans are available at no extra premium compared with normal loans.
The hardest and slowest part of any strategy is always the acquisition of the first property. Once you have scraped together a deposit, secured bank approval for a loan and purchased your first property, it will then usually take time to get your next investment. The first property generally needs to grow in value so that equity can be used in conjunction with new savings to acquire the next one.
The pace starts picking up once the investor has two properties growing in value – and by then they will hopefully have a better-paying job and increased savings. Like all investment strategies, time is needed to get some traction.
I am really excited when young investors come to me to talk about property and getting an early start on wealth creation, even if they are not quite ready. Compounding is the magic ingredient that will allow investors to create wealth, so the earlier anyone starts in property, the better.