How to save for your first investment property

How to save for your first investment property

Owning an investment property is a dream that most Australians share. However, for some, saving up for that deposit seems like an impossible task. This is especially true if you’re a first homebuyer and can’t borrow against your existing home equity.  

Because of this, plenty of people believe that owning investment property is merely a pipe dream. The good news is, it is possible. With a little bit of financial planning and prioritisation, you can get closer to your real estate investment goals. 

But make no mistake, it won’t be easy. However, you don’t have to do it alone. We have a few tips to help you save for your first investment property. 

How to save for your first investment property

Do your research 

Before we talk about saving money, you need to understand what your property investment goals are and the type of property and location best suited to reaching these goals. And that means doing your research.

When choosing a suburb, you have to consider growth potential. There are a number of factors that go into this. 

Population growth and community developments

Consistent population growth in a particular suburb will likely increase market demand in the future. If the supply doesn’t keep up with the demand, house prices can increase significantly. Additionally, established communities with a variety of amenities are generally considered more desirable by many homeowners. 

For this reason, it’s best to look for suburbs that have affordable homes but have the potential to become more desirable in the coming years. To do this, you have to look for early signs of development. See if there are government or commercial plans to build new amenities in your chosen suburb. For example, expansions or upgrades to nearby public transportation or shopping precincts can significantly improve the appeal of your property.

GentrificationInvestment property financial planning

Another sign of development to look out for is gentrification. You can identify a suburb that’s being gentrified through it’s demographic. Usually, younger professionals who are financially well-off will move to a ‘poorer’ inner suburb to be closer to the city center. The influx of wealthier residents will stimulate commercial development, leading to many trendy cafes and restaurants opening up in that area. 

In turn, this will influence even more residents to move to this suburb. This increase in demand will improve the appeal of your own property and, therefore, provide you greater rental yields. If you can get in early in this gentrification process, your rental home can become extremely valuable in the coming years. 

That being said, there is an on-going debate on whether or not gentrification is actually beneficial. On one hand, it increases the desirability of a certain suburb through the addition of new amenities and properties. On the other hand, since commercial development can lead to higher living costs, it leads to some of the long-time residents and businesses being priced out of the area.

Renter demographic and rental yields 

What you’re looking for here are tenants that are able to pay more and pay regularly. In this case, younger professionals and families are likely going to be your more stable renters. Understanding the demographics of an area will help you to determine the potential for attracting stable and reliable tenants. 

That being said, you should also research the median rental yield in areas you’re interested in investing in. The rental yield is the amount of money that you make from renting the property after accounting for all the associated costs.

The rental yield you can get from a property depends on a range of factors including the rent you are able to charge, the condition of the property, demand in the area, council rates and taxes and your mortgage.  

Calculate upfront costs

Once you’ve chosen a suburb, find out how much the properties go for in that area. If you’re looking for your first investment property, chances are, you’re already familiar with the costs of buying a home. However, it doesn’t hurt to remind yourself of what to expect. 

Calculating the upfront costs will give you a clearer picture of your finances. It will give you peace of mind, knowing that you have enough money for the deposit and additional payments. 

Ideally, your deposit will be 20% of the total property value. So, if you’re buying a home that is worth $400,000, you will need to save up $80,000. 

Unfortunately, the deposit isn’t the only thing you have to worry about. There are a few additional costs that you have to take into account. This includes:

  • Registration fees and stamp duty 
  • Conveyancing fees
  • Property and pest inspection costs
  • Loan application fee

As a side note, if you have enough income to pay off the loan, but don’t have enough saved up for a 20% deposit, you’ll have to pay the Lenders Mortgage Insurance premium (LMI). The cost of LMI will depend on how much money you’re borrowing. The more you borrow, the more you’ll have to pay for LMI. 

Essentially, LMI protects the lender if you happen to default on your loan. For example, let’s say that you default on the property and there’s still $500,000 outstanding. The lender then sells the property and gets back $460,000. Through the LMI provider, you might be required to cover the $40,000 shortfall. 

Because there’s so many additional costs to consider, it’s best to save quite a bit more than your initial 20% deposit. Also, if you’re not a first time buyer, you can use the equity on your current property to buy a second property. This way, you don’t need to save up for a cash deposit. 

Minimise bad debt

Racking up bad debt through credit cards and unnecessary personal loans can affect your ability to secure a loan and buy an investment properly. When you’re buried in debt, it can feel like your income is just disappearing into the ether. As a result, it’s recommended that you pay off outstanding debts before gearing up for your first investment property

There are a few advantages to prioritising your loans. First, it makes saving money significantly easier. You won’t have to worry about a percentage of your income turning into debt payment. Because of this, you can be more ‘aggressive’ in your savings by putting away an even larger percentage of your income on a fortnightly basis. 

Secondly, paying off your debts on time boosts your creditworthiness and increases your chances of being approved for a home loan. If you’re having trouble with your finances, you can talk to a financial advisor to help you manage your payments. 

Create a realistic savings plan Save first investment property

In a perfect world, you will set aside a percentage of your income on a fortnightly basis as savings. Unfortunately, not everyone has the ability, or indeed the privilege, to do that. 

You will need to create a savings plan that takes into account your current obligations while factoring in possible emergencies. Additionally, you also have to take into account the emotional side of finances. This means finding a way to stop yourself from impulsively using your savings on birthdays, holidays, night outs and so on. 

Here are a few tips that you can implement in your own savings plan.

Automate your deposits

If you feel that you’re not disciplined enough to set aside a percentage of your income each pay day, you can set up an automatic transfer. 

This will move a set amount of money from your checking account to your savings as soon as you receive your pay. With this set up, you won’t get the chance to spend that money on five-dollar coffee.

Bucketing

The bucket system is when you set up different accounts (or ‘buckets’) for different financial purposes. One can be for emergencies, one can be for your home deposit and one can be for a family vacation. 

Organising your finances this way will ensure that you won’t spend too much money on unnecessary things. Simultaneously, it also means you’re not completely depriving yourself of a little bit of fun. 

Set short-term goals

You might think that saving money is all about the numbers. However, it would be unwise to neglect the psychology behind it. 

When it comes to saving, consistency is key. As such, it’s good to have short-term goals. Setting achievable objectives will boost your morale and motivate you to stay consistent with your saving habits. 

Understand your investment strategy

It’s also important to be familiar with a couple of investment strategies. For example, with a negatively geared property, you’re not going to be able to cover your expenses with the rent alone. However, since negatively geared properties are considered a loss on-paper, you might be able to claim a tax deduction which you can use to cover expenses. 

On the other hand, properties with a positive cash flow will provide you enough money to cover expenses along with a surplus. An increased income will result in a better capacity to borrow money from lenders. Through this extra income, you might be able to buy even more properties in the future. 

Analyse your spending habits

Now that you’ve managed the money coming in, it’s time to manage the money coming out. If you’re not careful, your daily spending habits can have a detrimental effect on your finances. As a result, it’s a good idea to analyse your monthly expenses and cut out unnecessary spending. 

To give you some ideas, here are a few things that most people can do without.

  • Monthly streaming subscriptions
  • Eating out regularly 
  • Buying branded products
  • Going out every weekend 
  • Brand new phones 

At times, you’ll have to make sacrifices that are even more drastic than this. For example, there are plenty of university graduates who chose to live with their parents for the sake of saving money. Others are willing to live in a small apartment with roommates just so they could put aside a bit of cash every month. 

Living below your means involves sacrificing short-term conveniences for a long-term pay-off. 

Buying your first investment property is a big mountain to climb. But, just like with other tasks, it helps to plan ahead and to break it down to smaller components. If you follow the tips we’ve listed above and stay consistent with it, you’ll be closer to your first investment property.