Property investing is possible for low-income earners. In addition to the traditional ways of getting into property investing on a limited income, crowd funding now enables aspiring property investors to buy a share in a property for as little as $2,500.
Let’s look at some of the options for property investing for low-income earners.
Joining forces with friends and relatives
This option will boost attractiveness for banks. For example, a young person living at home earning $45,000 a year with savings of $30,000 is not an attractive client for banks. But if you can get three people with combined incomes of $135,000 and provide a deposit of $90,000, it’s a totally different story.
If you choose this option, you must have a written agreement in place, and you must split the loan along ownership lines. Some companies specialise in agreements for situations like this — one example is Pod Property.
For example, if you buy a new townhouse and your loan is $360,000 including buying costs, each of the three buyers can have a loan split of $120,000. One may pay interest only, one might make principal and interest payments and one could make large extra payments. When the property is sold — per the sale date in the agreement — your net proceeds will vary depending on your loan balance at the time of sale.
Family pledge loans
A family pledge loan can work for low-income earners buying a low-priced property, particularly those living at home as no rent means you can borrow more. Essentially if you have a family member with equity in their home, they can let you use that equity as a deposit to buy your first home or investment. You will need to show the bank some savings history but you can borrow 100% of the cost of buying the property. (I cover this zero-deposit option in more detail in my book, The Formula to Successful Property Investing).
Crowd funding — an exciting new option
DomaCom is an example of a company offering property crowd funding. Their model enables low-income earners to invest in direct property in a new way.
Here’s a brief overview of how it works:
- A property is loaded on to the DomaCom platform, and through your financial advisor, you nominate to buy a percentage of that property. Your investment can be from $2,500 to any amount you like.
- Each month you receive your share of the rent.
- Every year the property is revalued so you know how it is performing from a capital growth perspective. After five years all owners vote on whether to hold this property for a further five years. The vote must be unanimous — if you vote to sell and the other owners vote to hold, they have 30 days to buy your share, otherwise the property is sold and your share is paid to you.
At any time in those five years, you can offer your share for sale through the platform at whatever price you and the buyer agree.
Property crowd funding creates new possibilities
You may be saving a deposit for a property but you are constantly chasing the market, with prices rising faster than you can save, and you are receiving very little interest on your savings. Now you can put your savings into a share of a property and likely get a higher return on money than bank interest plus the capital growth as well.
You might have some money inside a self-managed super fund that you can use to invest in property instead of shares. Parents or grandparents who want to put money aside for the future of young ones can now put that money into an investment property instead of shares or a bank account.
With this crowd funding model, you don’t need to invest in one property — you can buy shares in multiple properties or a portfolio of them that are listed as one package. You also get to choose the property type you think will work best for you.
Your key options with property crowd funding are:
- Residential balanced – properties that will achieve both reasonable cash flow and capital growth
- Capital growth – typically inner city heritage properties that will have a poor rental yield but provide excellent capital growth
- Cash flow – dual income properties or an inner-city apartment let out on the short- term rental market.
Of course, selecting the right property is vital. Stay away from student and holiday accommodation, hotel rooms and the like. Stick to standard residential property or, perhaps, the right commercial one.
Michael Sloan – May 2017
To speak to a Property Advisor about alternative ways to fund your next investment property call us on 1300 800 886.