Getting the capital you need for an investment property is no easy feat. The high up-front costs of stamp duty, transfer fees, mortgage registration fees, and the deposit itself can feel like a tough pill to swallow. Plus, there’s also the fear that your property might not increase in value and deliver the returns you’re expecting. Understandably, if you are a first-time investor then this might be more daunting for you than others, and the question of how to invest in real estate with little money in Australia might be more challenging to answer.
With thousands of dollars at stake, it can seem too risky and expensive to invest in property at all. But, there are more ways to invest in property than you might think.
While a higher income does make it easier to secure an investment property, it’s not the only option you have. In fact, recent data from the ATO reveals Australians earning a taxable income between $18,200 and $50,000 own 26.76% of all investment properties nationwide.
Even on a low income, it's more than possible to get your foot in the door of the property market.
There are ways to make it happen, it’s all about knowing what options you have to play with, especially if you are a first-time buyer.
So, what low risk property investment options are out there? And how can you buy property with little money?
Let's walk through the 7 most common options.
1. Use your current home's existing equity for property investment
Equity is money jargon for how much of an asset (such as a property) you actually own. You can figure this out by deducting your home loan from your property’s total value, for example: if your property is worth $800,000 and you owe $350,000, your equity is $450,000.
Drawing on your existing equity can help you increase your lending power and lower the upfront cost of securing an investment property. In most cases, you’ll be able to access up to 20% of your property’s value from a lender.
However, you’ll need to have a home already under your belt to take advantage of this strategy.
2. Access a guarantor loan
When it comes to home loans, how much you pay is linked to how ‘risky’ it is for a bank to lend to you. If you’re unable to pay back your loan or meet your mortgage repayments, your lender wants to make sure they can recoup their losses.
What is a guarantor loan?
A guarantor loan means using a guarantor (usually a close relative) to offer up extra security for your loan. They’ll be responsible for paying back the loan if you can’t and often offer up equity (such as a portion of their home’s value) to help you secure a property with a small deposit.
Having a guarantor can be a helpful strategy to lower your lending risk and help you avoid paying fees (such as Lenders Mortgage Insurance, which is an insurance policy for lenders if you default on your loan).
3: Consider a joint application for property investment
Thinking about purchasing an investment property with your partner? A joint application might be a wise move to help access a larger loan and increase your chances of approval, some lenders may even consider it a low risk property investment since there are two applicants.
What is a joint application?
A joint loan means you and your co-applicant are equally responsible for servicing the loan. While this can boost your chances of securing finance, you’ll need to make sure you’re both able to meet the repayments. Plus, you need to accept the risk of being liable for the entire loan if the other person is unable to meet their side of the bargain.
4. Investing through a Real Estate Investment Group (REIG)
Real Estate Investment Groups offer slightly LOWER risks at a slightly HIGHER price point.
Looking for a hassle-free way to invest in property? A Real Estate Investment Group can be a hands-off way to own an investment property.
How do real estate investment groups work?
An REIG is a way for investors to purchase real estate without having to take on the responsibility of managing the property themselves. Typically, REIGs purchase or build a set of apartments that investors can buy through the company (thereby joining the group).
As an investor, you can choose to own one or many units, and the REIG manages all of the admin, maintenance, advertising, and tenant selection on your behalf. To do so, the company will usually take a slice of your monthly rent in return.
In most cases, the REIG lease is in the investor’s name. Plus, the investors pool a portion of the rent to cover the costs of vacancies across the apartment complex.
What are the pros of using a real estate investment group?
- A stress-free, low-touch way of owning an investment property as the REIG manages the day-to-day running of your investment property.
- A simple way to generate income and build equity that requires a minimal investment of time and effort from investors (like you).
What are the cons of using a Real Estate Investment Group?
- If vacancy rates spike across the complex, this may impact your returns and rental income.
- The fees are usually similar to mutual funds which can eat away at how much income your earn from your investment property.
- Lack of oversight means you’re putting your trust in the REIG to manage your investment property effectively (which can be a risky approach).
In that sense, REIGs offer somewhat the same benefits as hiring a property manager, and are a good option for anyone who doesn't want to get into the nitty gritty of property research or management.
5. Consider a fractional property investment approach
Fractional ownership requires much LOWER capital requirements, but yield significantly LOWER returns.
Looking for a flexible, low-cost way to get started in property investing? Fractional property investment might make sense for you.
What is fractional ownership?
As another pooled investment strategy, fractional ownership splits the cost of a single property into shares which are then sold to investors. This gives investors the chance to buy shares in the type of properties that suit their needs (rather than being limited to the pre-selected properties available through REIGs).
How does fractional ownership work?
To get started, you’ll need to go through a fractional investment platform. Once you secure shares in a property, you’ll earn an income from the rent. Plus, you can receive capital returns when the property is sold or if you want to sell your shares.
What are the pros of fractional ownership?
- The low-cost of buying shares (as opposed to saving up to buy the entire property) eliminates the high barrier-to-entry for many first-time property investors.
- As a liquid investment, you have the flexibility to sell your shares at any time and access any capital gains made on the property.
- You’ll also have the ability to diversify your funds from day one across multiple types of properties for a low initial cost (something that’s not possible with traditional property investment).
What are the cons of fractional ownership?
- The returns you generate as a fractional owner tend to be lower as you’re only invested in a portion of the property.
- As you don’t own a tangible asset. you won’t have the opportunity to become an owner-occupier if you wanted to live in your investment property down the line.
6. Investing through a Real Estate Investment Trust (REIT)
Real Estate Investment Trusts require a LOWER capital and LOWER risk at the expense of yielding LOWER returns. The logic is more similar to that of investing in stocks than investing in real estate.
Looking for another way to invest in property without putting down a huge initial payment? A Real Estate Investment Trust (REIT) is another attractive alternative to traditional property investing to consider.
What is a Real Estate Investment Trust (REIT)?
A Real Estate Investment Trust is a way to invest in property using stocks. This approach is similar to a managed fund, and pools investor’s money together to invest in properties.
In Australia, REITs (known as A-REITs) are traded on the ASX. This gives investors to chance to take part for as little as a $500 initial investment.
Plus, REITs usually invest in commercial properties (such as offices, shopping centres, and hotels), which gives investors the chance to diversify their investments beyond resident properties, too.
What are the pros of using a Real Estate Investment Trust?
- You’ll be able to earn an income from rent and capital growth for a low-cost, without the need to purchase the physical property.
- Most REITs payout their taxable income to shareholders as dividends, which gives investors an extra stream of income.
- You’re not locked into the investment and have the flexibility to buy and sell your shares when it suits you.
What are the cons of using a REIT?
- It’s essential to check the management team taking care of the investment and ensure they have a low level of debt to lower your risk as an investor.
- If your REIT is planning to build a new building, there’s also a development risk to consider. This means you should consider their chances of leasing out the property.
- Plus, be sure to look at the dividend payout ratio (how much of the company’s profits are paid out to investors) to understand your potential returns.
7. Investment property overseas
Investing in property overseas is a very common strategy. It exploded in popularity after the GFC with many foreign real estate markets plummeting in price, leaving cheap housing with high profit potential up for grabs.
Investing in foreign countries can be a great way of diversifying your portfolio.
What are the pros of investing in property overseas?
Apart from potential bragging rights of owning a cozy cottage in the Swiss alps or a romantic seaside apartment in the French Riviera, there's real, tangible benefits to investing in real estate overseas:
- Access to new markets you wouldn't find at home. Instead of just looking domestically, you can find brand new investment opportunities in a global market.
- You decrease your overall risk. By not putting all your eggs in one basket, you have properties that will not decrease in value even if the Australian real-estate market takes a hit.
- You can use them as personal vacation homes. It's very common for investors to want a vacation house first and then figure out that they can rent it out while they're not using it. Of course, this is only really applicable if you're investing in tourist destinations, which narrows your investment options.
- Lower costs. Countries like Brazil have extremely cheap real estate compared to Australia. By looking globally, you can find much more cost-effective investment options.
What are the cons of investing in property overseas?
- You have less control. It's harder to manage a property when you can't stop by on your way home from work to fix something. Hiring a local property manager is a common solution.
- Dealing with tenants abroad. Language discrepancies can be hard to manage, but you also have cultural differences to work out. It's a new experience, and can be challenging to some investors. Again, a local real estate agent helps solve this issue.
- You're subject to new tax laws. Investing in a new country means a whole new set of real estate laws and taxes you need to stay on top of.
- Some nations have anti foreign investment regulation.
- It can be more difficult to get approval for a loan for investment properties overseas.
Getting your foot in the door of an investment property
Ultimately, there is no silver bullet when it comes to finding the elusive ‘unicorn’ of how to invest in real estate with little money in Australia? There is a range of low-cost options to consider, these do come with drawbacks (such as higher levels of risk and lower potential returns).
As an investor, you need to figure out where you are willing to compromise and what you value most when deciding the best approach to follow. If keeping costs down is your top priority, accepting slightly lower returns might be a necessary trade-off.
Always remember that the only good time to invest in property is when it's the right time for you, and your financial situation.
With a better understanding of what options you have, you’ll be in the best position to make an informed decision about how to secure an investment property (and will be aware of what potential risks and rewards you might encounter along the way).
Disclaimer: The information on this website is for general information only. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. :Different and Real Wealth Australia are not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.