How Much Do I Need to Get Started as a Property Investor?

Posted by Ed McKnight on 25/03/20
How Much Do I Need to Get Started as a Property Investor
Introduction

How Much Do I Need to Get Started as a Property Investor?

"What do I need to get started in property investment?" – it's a common question and one that we have answered many times here at Opes Partners.

In this article, you’ll learn the two ‘thresholds’ you'll need to meet to get started as a first-time property investor.

You’ll then also learn how to break the rules along with strategies you can use if you don't quite meet these thresholds.

Threshold #1

1) $90,000 of ‘Useable Equity’ Within Your Home

years, many of us have equity – 'dead money' – in our homes that we aren't making the best use of.

We can use this equity to secure a deposit for an investment property. But we can’t access all of it. We can only tap into what’s called 'useable equity'.

To figure out how much useable equity you have:

  • Multiply your property's value by 80%. This will give you the "bank value", which is the maximum amount you can borrow against the property.
  • Then take away the balance of your mortgage from this figure. This gives you ‘useable equity’.

For instance, if your own home is worth $500,000 and you have a mortgage of $300,000. Then:

Step #1: $500,000 x 80% = $400,000

Step #2: $400,000 - $300,000 = $100,000

This means the owner of this property has $100,000 of useable equity and meets the $90,000 threshold.

If you were the owner of this property, what could you do?

You could take the useable equity to a bank and use it to secure up to $500,000 worth of lending, which you could then use to purchase a brand new investment property.

Why is the threshold $90,000?

At Opes Partners we scour the market looking for brand new investment properties and typically we find the minimum investment-grade properties starts from $450,000.

Because new properties generally require a 20% deposit, that means $90,000 of useable equity (or a combination of useable equity and savings) is required to purchase a $450,000 property.

You can also use our equity calculator, to see the level of useable equity you have in your property.

Threshold #2

2) A Small Amount of Cash Each Week

If an investor acquires an investment property with 100% lending (i.e. you don’t put any cash in), through the above method, then it will generally make a small cash loss each week.

This means you will need to top up the mortgage by a small amount each week.

$50-100 a week will typically allow you to invest in a property that will achieve good capital growth, like a standalone house or townhouse (depending on the city).

However, even if you can afford this, you will also need to pass the bank's servicing tests.

Most investors today will apply for a 30-year mortgage with an interest-only period of 5 years at a rate of about 3.5%.

But when the bank makes its calculations on whether you can afford the property, they will use a 'test rate' of about 7% ... and they will test it using a principal and interest structure over 25 years (after the interest-only period).

This can make a big difference.

A $500,000 interest-only loan at 3.5% attracts interest payments of $336.54.

However, the same loan at 7% interest over a 25-year term attracts weekly repayments of $815.

That's why you'll need a certain level of income to be able to afford these repayments, even though you would never have to make these for another 5 years in the worst case scenario.

But don’t let this scare you off investing since the bank calculations are based on several factors and you will have a tenant covering most of the mortgage payments.

So, just for now, the threshold is the $50 - $100 a week to put towards your investment property.

Now, let's run through three examples of people who are and are not ready to start investing.

Case Studies

3 Real Life Case Studies of People Who Can and Can’t Invest

As part of our Property Investor Quiz, hundreds of Kiwis have tested whether they are in a position to invest.

Here are three real life situations given through the quiz with an indication of whether they are in the right position. You can use this to get a feel for when you will be in a position to invest.

Case Study #1: Green Light – Ready to Invest

They Say:

“I’m married, with 2 kids. Our house is worth $500,000 and we have a mortgage of $90,000, with no savings. I earn $100,000 and my partner earns $50,000.”

We Say:

"Great, you’re in a position to invest. You have $310K of useable equity to use as a deposit, which can purchase up to $1.55m of property. Your income is also high enough that you will likely pass the bank's servicing criteria."

Case Study #2: Orange Light – Potentially Ready to Invest

They Say:

“I’m single, with 1 kid. My house is worth $500,000 and I have a mortgage of $320,000 with no savings. I earn $60,000.”

We Say:

"You may be in a position to invest, but we would like to go into a few more details. You have $80K of useable equity to use as a deposit, which can purchase up to $400K of property. This puts you on the cusp of being able to start. Your income is also borderline for the bank’s servicing criteria. We’ll need to do some work to get you ready, but it’s not a hard ‘no’ yet."

Case Study #3: Red Light – You're Not Ready to Invest

They Say:

“I’ve got a partner & no dependants. Our house is worth $350,000, no mortgage, & we have $100,000 of savings. We both earn $17,000 each.”

We Say:

"You’re probably not in a position to invest. You have $380K of useable equity + savings to use as a deposit, which can purchase a maximum of $1.9m of property. But your income makes it unlikely that you will pass the bank’s servicing criteria."

How to Break the Rules

But there are ways to break the rules

Even though we just gave some pretty tight rules about what you need to become a property investor, there are always ways to get around rules and get to the investing position.

Here are a couple of ways to break the general rules of thumb if you think you're not likely to meet these thresholds.

Strategies if you don't have enough equity

  • Use any savings, along with your useable equity to get to the 20% deposit requirement
  • Tap into the ‘bank of Mum and Dad’, and ask whether they can use their useable equity to guarantee your deposit
  • Technically there are no government rules that set minimum deposit requirements for brand new houses. Banks will sometimes (at their discretion) offer loans with only a 10% deposit. That means you can get started with just $45,000 of useable equity, and
  • Invest with a close friend or sibling and pool your savings and useable equity to get started.

Strategies if you don't have a cash surplus

  • Invest in a property, like an apartment, that makes a small surplus each week, so you don't need to put money into the property each week.
  • Set your property up as an Airbnb, rather than a tenanted rental. This will generate higher cash returns than tenanting so you don’t have to put money in.
  • Increase the term of your existing mortgage to decrease your mortgage repayments. You can then use the money you were paying towards your mortgage to top up an investment property. Extending the duration of a $500,000 loan from 20 to 26 years will free up $100 a week. You can then use the investment property to pay off your mortgage faster.
  • Purchase a property early in its development (off the plans) and negotiate a cashback from the developer, which you can use to pay for contributions.

While there are rules of thumb about what you need to get started in property investment, there are strategies you can employ to make a start.

The key is to become a property investor as soon as you can so you can spend as long as possible in the market.