Many first time investors are often of the belief that buying an investment property is out of their reach, particularly if they do not have any equity built up in an existing property and face the prospect of saving for the deposit from scratch.
This can be a daunting prospect, particularly if the deposit is in the order of $50,000 to $80,000. But it’s not impossible. All you need is a robust budgeting strategy and the willingness to be patient. A strong five year budgeting strategy now could potentially earn you tens of thousands of dollars (or more) in the long run! As the saying goes, a little short term pain is worth the long term gain!
Included below are five easy tips to get you thinking about your budget.
1. UNDERSTAND YOUR INCOME
It might sound obvious, but it is important to know exactly how much income you receive each month (your gross salary), and how much you take home after tax and any other expenses are deducted (your net salary).
Once you know your net salary, you also need to deduct any regular expenses you incur each month after your pay hits your bank account. This may include items such as an existing home loan, car loan, rent, private health care, credit card repayments, gym memberships or tertiary fee repayments.
Once you know how much you are left holding in your hand each month after all your major expenses are paid, you can start to get serious about working out your budget!
2. BE AWARE OF THE TOTAL COSTS OF BUYING AN INVESTMENT PROPERTY
If you are looking to purchase your first investment property, don’t just look at the purchase price of the property. You need to factor in all upfront costs associated with the purchase to ensure your budget and savings will be adequate. Listed below are some of the upfront costs you will need to budget for:
- Deposit – this amount can be up to 20% of the purchase price, depending which lender you use;
- Loan establishment fees – some lenders may charge you a fee to establish your investment loan;
- Mortgage Insurance - if your deposit is less than 20% of the purchase price of the property, you may be required to pay for Mortgage Insurance which is designed to protect your lender if you default on the loan;
- Stamp Duty – the Stamp Duty will vary depending on the purchase price. For example, if you are purchasing a brand new investment property in WA valued at $400,000 you will need to budget for an additional $13,000 (approx) to cover Stamp Duty.
- Mortgage Registration Fee and Transfer Fee – buget approximately $500 for these additional Government fees;
- Building and Pest Inspection – if you are purchasing an established home it is recommended you pay for a Building Condition Report and Pest Inspection to ensure you are aware of the condition of the property prior to settlement;
- Conveyancing and Legal Costs – this may include fees paid for the legal transfer of ownership of the property or if you request a legal representative to review your contract documentation prior to purchase. This is a common request, particularly from investors who are purchasing a new property off-the-plan which involves a more detailed contract;
- Valuation Fees – this cost will be incurred if you use a registered valuer to value the property.
3. BE REALISTIC
Once you know what deposit you need to save, be realistic about what timeframe you need to achieve it. If setting yourself a tight budget means you have absolutely no money left each week to enjoy yourself, you are going to be totally miserable and more likely to fail. Make sure you factor in all the things that are important to you such as going out for dinner with friends, catching a movie or going on a holiday. Budgeting means you will need to make some sacrifices but it doesn’t mean you need to spend the next five years locked inside your house living on nothing but toast and baked beans!
4. GET HELP FROM THE EXPERTS
If you have never had to seriously budget, it might not be as easy as you think. Luckily there are plenty of budgeting templates, Apps and services available online that you can use as a guide. They will prompt you to think of all your monthly expenses you are likely to forget about such as toiletries, hair and beauty appointments or paying the lawn mowing man! They are all expenses you need to account for and they all add up so it’s important you don’t miss a thing.
If you find yourself struggling, don’t be afraid to ask for a little expert assistance. Investor Assist can introduce you to the expert team at Bluebay Home Loans (another business within the ABN Group) who have a tailored budgeting package called ‘My Home Plan’ which is a simple and effective way to get your finances in order and allow you to purchase a new property sooner!
It’s built around your real-world income and expenses, and usually involves only a few tweaks to your spending habits. The Bluebay team will discuss your financial situation, goals and put together your tailored plan. They will also assign you a dedicated mentor to help you stick to it!
5. MONITOR YOUR PROGRESS AND PERSEVERE!
Finally, it is always important to remember that if property investment was easy – everyone would be doing it! It is estimated less than 10% of the Australian population own an investment property and that is because so many people give up too easily, thinking it is unobtainable or too hard.
Property investment should not be viewed as a ‘get rich quick scheme’ but a lifelong strategy focused on securing your financial future. If you are going to get into property investment, you need to be in it for the long haul and if it takes you five years or longer to save a deposit – you are still five years (and a lot of money) ahead of everyone else who have delayed making the commitment.
Most importantly, throughout the budgeting process, always monitor your progress and persevere! If you fall behind or overspend your budget on a holiday, don’t give up, just reassess your spending and get yourself back on track. Plus if you happen to earn some extra income in the form of a pay rise or inheritance, factor this into your budgeting and save more each month. All your hard work will be worth it in the end!
If you need assistance trying to figure out how much you need to save to buy your first investment property, contact the team at Investor Assist here or on (08) 9200 7200. We can also put you in contact with Bluebay Home Loans if you are keen to know more about ‘My Home Plan’.