- Buy an investment property that pays for itself - is positively geared.
- Invest wisely, in an area showing signs of good growth, for higher equity.
- You can use this equity as your next deposit on an investment property.
When it comes to buying property, one of the hardest challenges is saving up enough for a deposit, particularly if you are buying your first property. Then, when you are ready to start your investment journey, you want to make the right decision to start your portfolio.
So, if you have saved up $50 000 what would be the best use of this deposit right now?
If you really want your property to work for you, you will want to buy an investment property that pays for itself (is positively geared) so that you are not having to pay for the property out of your hard-earned income.
This can be achieved through analysing rental yields and cash flow when purchasing the property.
Further, a successful investment property will be located in an area showing signs of good growth, and if you have invested wisely you may be able to use the equity from your investment property so you do not need to save up for another deposit for your next property purchase.
Cash flow
Ideally when looking at rental yields, a yield of around five per cent would be the minimum rental yield you would consider to be a positive cash flow property.
This means that the property will be essentially “paying for itself “ from the rental income you receive and tax considerations, so that you do not need to use your own salary to cover the costs of the loan on the property.
Positively geared properties
When a property is positively geared, this means that at the end of the day – after the rental income, expenses, interest payments, and depreciation (non-cash deductions) are tallied up – the property is in a positive position and not sitting in the red.
This does not necessarily mean the property is cash flow positive so you may need use some of your income to help keep the property running, but after the non-cash deductions like depreciation, your property will come out positive and help your serviceability in the eyes of lenders for your next property purchase.
Equity
If you are able to achieve a positively geared property that has positive cashflow each month, the lenders will be looking favourably on your property portfolio, and this will assist you to be able to afford your next property. If you have purchased in a good growth area, and the property is now worth more than you paid for it, then the equity in your property may be able to assist in funding the deposit on your next investment property.
Renovations
If you are wanting to grow a property portfolio, another option is to not spend all your deposit on the property purchase. Putting a smaller deposit down, and spending some excess funds on renovations may help you to build your property portfolio.
By performing some simple renovations, such as painting, new carpets and furnishings, new tapware, and basic landscaping – your property may increase in value and the equity gained can help you build your property portfolio.
Another benefit of doing basic renovations, is that you may be able to charge more rent on the property, meaning a better cash flow for you.
Keep in mind though that with a lower deposit you will need to buy a cheaper property and some of them can be in inferior areas, so it is essential you do your due diligence properly. You can still buy quality assets at affordable prices. Just do the research.
Government grants
Another way to make your $50 000 deposit work for you, is to access some of the Government grants on offer to boost your amount. Keep in mind that each state and territory will have their own grants and home buyer schemes.
In NSW, first home buyers can access First Home Buyer Choice providing the option between paying a smaller annual property tax, instead of stamp duty.
The NSW Government is also launching the Shared Equity Home Buyer Helper initiative for single parents, older singles and key workers.
Further assistance is available in the First Home Owner’s Grant (New Homes), and the First Home Buyer Assistance Scheme.
For more information, pick up my book Buy Now – the Ultimate Guide to Owning and Investing in Property – it tells you all you need to know. My book Positively Geared – How to Build a Multi-Million Dollar Property Portfolio from a $40K Deposit is not bad either (in fact it’s a bestseller!).
