Building wealth with property requires the investor to have access to a large amount of capital. Simply put, capital is a sum of money, which you use to invest and make more money.
Property provides a way to invest capital and increase wealth through capital growth however, most people don’t have a large sum of money lying around in their bank account.
So how do you purchase a property? Ask someone else to pay for it, as long as you can provide a deposit. This is known as leverage, and it is a major advantage in property investment because for only a small deposit, you can borrow a large amount of money, for a large return and low risk.
Here are 3 ways to raise your deposit to invest in property.
1. Savings
It is almost impossible to save the entire cost of an average residential property, which varies between $350,000 and $850,000 in most urban cities in Australia.
But, thanks to leverage, you only need to save a small deposit. How much deposit to save, will vary based on the lenders ‘Loan-to-Value-Ratio’. Most banks will currently loan up to 95% of the value of residential property, which means you will only need a 5% deposit.
It is a good idea to save 20% of the total purchase price, because there are additional costs involved when buying property. These include lenders mortgage insurance, title transfer fee, conveyancing, valuation fee, council rates, stamp duty and land tax.
2. Borrowed Funds
You may like to use a credit card or a personal loan to raise your deposit. This will affect the amount of money you can borrow, however it will mean you don’t have to wait for your savings.
Even if you don’t save your deposit, It will help your loan application if you have a savings record, so try to save as much as you can for at least 6 months before borrowing money for a property.
Other ways to obtain borrowed funds is by using a guarantor or a monetary gift from family. It is generally not a good idea to borrow the entire purchase price in case the property value decreases and you are left with a higher debt.
3. Equity Lending
The best way to raise a deposit without savings is with equity from your existing property. You don’t have to pay off your home loan before you can access equity to buy another investment property.
Accessible equity is simply the difference between your mortgage balance and the current property value. Useable equity is 80% of the current value less the current mortgage. It is your useable equity that can be used for a deposit for your next investment property.
If you are selling your property to purchase another and you have equity available, you could raise your deposit with ‘bridging finance’. A bridging loan provides the funds to purchase the new property, including the deposit and extra purchase costs.
