More about real estate investing on a single income

Continued from a previous post:

Positive Cash Flow Property

Finding investing properties that earns enough rent to cover the costs of owning it canmake it a lot easier to get into investment property. Finding such property isn’t as easy as it used to be – but it’s still possible.

Tricia Green of Home Loans Now in Brisbane says positively geared property real estate will make a difference in getting a loan with a low income. “If it’s close to neutral, it’s pretty good as well,” she says. “But it depends on the individuals’ circumstances.”

Montgomery says: “If it’s positive cash flow it will increase their chances – totally.” But Lomas warns that the property needs to be positive by virtue of its rental income, not through tax deductions. “If it’s positive cash flow because of tax deductions, it won’t make much difference,” she says.

“If the return is 5 per cent and it’s on paper deductions like depreciation that makes it positive cash flow, the bank won’t be impressed. Borrowing criteria is worked out on disposable income – what you have left after you’ve paid tax and personal debts. “If you have positive cash flow because the income is greater than the expenses, then it will enhance your borrowing capacity. The bank will take whatever income the property is generating and add that to your income.”

Lomas suggests there’s a risk factor. These days, she says properties which are positively geared by virtue of a high-rent are mostly found in one-industry towns such as mining towns, where values are dependent on the longevity of the resource boom. Those willing to take the risk can find high-returning properties in town such as Moranbah and Blackwater in Queensland, Newman in Western Australia and Whyalla in South Australia.

Keep in mind, however, that the entry price is getting quite high in some mining towns, particularly in Moranbah and Newman where good houses cost $350,000 to $400,000 often more. It is possible to get 7 per cent to 8 per cent returns in major cities, but they tend to be found on smaller apartments – one bedroom and studio apartments – and that presents another set of problems. While such properties have a low entry price and good returns, many financiers are reluctant to lend on properties under 50sqm. Green says attitudes are changing and some lenders have reduced their minimum to 40 sqm, while some will lend on any size of property provided it’s not mortgage-insured.

Good locations to find units with the highest returns include Spring Hill in Brisbane, Tweed Heads West in northern NSW, Darlinghurst in Sydney and the Manoora/Manunda precinct in Cairns. Two likely capital-city locations for good returns on houses are the Beenleigh areas south of Brisbane and the Elizabeth precinct in Adelaide.

Making it easier to get finance

Wizard Home Loans says borrowers make a range of common mistakes that make it harder for them to get finance. In particular, it says borrowing hopefuls commonly believe a number of misconceptions. One prevalent myth is that banks are interested in how much you owe on your credit cards. They’re not; they want to know the total of the limits on al your cards.

“Every type of credit you have in your name, regardless of balance, is used to calculate your ability to service your loan,” says Wizard chairman Mark Bouris. “the less credit (credit cards and other loans) you have on your home loan application, the better.”

Green says: “if you have $30,000 in credit card limits, they’ll take 3 per cent of that limit as a monthly expense sometimes 2.5 per cent, it depends on the lender.” Another misconception is that you need a 20 per cent deposit to get started. “Not true!” says Bouris. “These days you can borrow up to100 per cent of the real estate property value. This is proving to be an attraction option for many cashed-up first homebuyers, who often wonder whether they’ll ever get their feet on to the property ladder.

“One hundred per cent finance provides a lifeline to many people who otherwise would be unable to buy a property.” “From a lending perspective, a lack of a deposit isn’t a major obstacle. What really matters is ensuring that borrowers can comfortably meet their mortgage repayments in the future – and if interest rates increase. “But a lower deposit may mean a higher interest rate and fees.”

Green says it’s possible to borrow 100 per cent of the purchase price of the real estate investment property, but borrowers need to have money set aside for costs such as stamp duty, legal fees and mortgage insurance.

“And when you’re borrowing 100 per cent, the lender is a lot tougher in their criteria. If you’ve just started a new job, for example, they won’t look at you.” The less deposit you’re able to pay when you apply for a loan, the higher the premium of the mortgage insurance.

Some borrowers think a bad credit history doesn’t matter if they eventually pay off the debt. The truth is that a patchy credit history can hurt a borrower’s chances, evne if the issue is very old or just a small, one-off amount. Lenders consult the major credit reporting agencies, which record debts (including any missed or defaulted payments on credit cards, interest-free contracts and mobile phone plans), while assessing a loan application.

Another myth is that assets count the same as income in the eyes of the lender. They don’t. Bouris says, “People often believe that a strong asset position can be a substitute for income when it comes to servicing a loan. But no matter the strength of your assets, what really makes the difference is your capacity to repay the loan through a regular income.”

Shared Equity Investing

Green says equity finance mortgages, or shared equity loans, are new to the real estate market and there’s lots of resistance from consumers. While buyers can achieve a property purchase for less than the full price, they have to forego a chunk of the capital growth when they sell. “The jury is still out on this kind of product,” she says. “There are lots of pros and cons – and many people are against them.”

The general concept is that the ban retains a 20 per cent share of the property investment but receives 40 per cent of the capital gain when the property is sold. The property is solely in the name of the borrowers: they’re granted two loans by the lender, one for 80 per cent of the value and the other for the remaining 20 per cent. The smaller loan is interest free.

When the property investment in real estate is sold, the lender gets there 20 per cent contribution back plus 40 per cent of the capital gain. The 80/20 split isn’t the only possible configuration – it could be 90/10 or 85/15. “A lot of people are against them once they realise they’ll lose 40 per cent of the future growth,” Green says.

Montgomery says this kind of loan product is specifically targeted at individuals who struggle to buy property in the normal way. “These types of loans are quite complicated in their structure at this point in time, but as these types of loans roll out and become a little simpler to understand, they may be an option for single people.”

Montgomery says the State Government in Western Australia recently introduced a shared equity product which allows first homebuyers to purchase part of a property, with the government buying the other part.