Investing in property on a Low Income

How to invest on a low income

While you may not need a six-figure salary to invest in property, those who earn a relatively low income will require a little more creative thinking to start a portfolio. Here are some tips to help you get started.

Find an investor-friendly loan

The challenge for low income earners is the time taken to save for a sufficient deposit. Some lenders require a higher deposit for an investor than is required for an owner-occupied property.  So, seek out a lender and loan that is investor friendly, or consider living in the property for a period after the purchase before converting it into an investment property as your portfolio grows.

Having at least 10 per cent of the property’s purchase price as a deposit will not only increase the likelihood of loan approval, it will also increase your borrowing capacity and lower the cost of lenders’ mortgage insurance (LMI), if required.

Find the right loan

If you’ve gone to a major bank and been turned down from a home loan don’t despair as you may be eligible for a loan through a specialist lender. Specialist or non-conforming loans do carry higher interest because of the higher perceived risk that the lender is taking, but you should see this type of loan as a stepping-stone to a prime loan and regularly review your loan and switch to a prime loan as soon as possible.

Prove your financial discipline

Your lower income on an application can be offset by proving yourself a low risk borrower. Having genuine savings will not only highlight to lenders your ability to consistently meet financial payments and live within your means, it is also an opportunity to increase your borrowing power. The same can be said for lowering any existing debts.  This includes lowering your credit card limit as lenders always calculate your ability to service a loan based on the limit, not the balance.  You also want to try and pay off any personal or car loans before applying for an investment loan because the repayments can have a significant impact on an your borrowing power.

Choose the right property

When choosing a property to invest in you might want to steer clear of anything that’s negatively geared for two reasons:

1. Negative gearing means that you are paying out more money than you are receiving in rental income. That not only hurts your borrowing capacity but hurts your pocket and lifestyle.
2. The tax benefits are lower because your marginal tax rate is relatively lower. This ties in with the point above.

Research regional areas and other capital cities as the entry point into the market.  Although there might be less capital growth, there are higher rental yields on offer.

Seek out different strategies

Look at making principle and interest (P&I) payments as interest-only loans are suitable in specific circumstances.  Also, when an interest only loan converts P&I the monthly repayments are higher as the length of time to pay off the principal is reduced.

Investing with a close friend or relative is another way to enter the market. As long as agreements are in place, including who is responsible for the mortgage and what happens if one owner defaults, how the property will be used, in what circumstances it may be sold, and how maintenance will be paid for, co-ownership is preferable to not owning a property at all.

Property investment may not be as straightforward to low-income earners, but in most cases it is accessible, provided the right property and finance products are sought out. For further information contact us here or give us a call on (02) 9614 0888.