5 Strategies if you don't have the money to invest just yet

So you want to invest in property, but maybe you don’t have the money to invest just yet?

In this article you’re going to learn the 5 strategies you can use to get the equity you need to buy your first investment property.

But, if you prefer to learn by watching, here's a video from our Economist, Ed walking you through the 5 strategies 👇

To become a property investor, you’re going to need a mortgage.

And to get that mortgage, you’ll need two things:

• A deposit, and
• Enough income to afford the loan.

In this article we’re going to primarily focus on the deposit side, since that’s where first-time property investors tend to fall short.

How Much Equity or Deposit Do You Need?

The minimum deposit is typically set by the Reserve Bank, which changes its regulations from time to time.

Right now, if you’re buying outside LVR restrictions, the minimum deposit is 20%.

Say you’re aiming for an entry-level investment property valued at $500k. You’ll then need a $100k deposit.

You might be thinking: “But I don’t have $100k in my bank account to invest!”

That’s OK. Most property investors don’t have that kind of money lying around either.

Instead, they use the equity within their own homes as the deposit for their investments.

Let’s say you own your own home, and it’s worth $500k today, with a $350k mortgage secured against it. That means you can borrow up to $50,000 against that property to use as a deposit for an investment property.

That’s good, but not quite the $100k you need. That’s where you’d use the other 5 strategies to get the extra $50k.

#1 – Pay your mortgage off more quickly

To become a first-time property investor, the person in the above scenario needs to create an additional $50k of useable equity in their property.

The good news is they’ll already be creating more equity by paying off their mortgage.

But if the investor was to use this strategy and pay off their mortgage more quickly, they’ll get into their first investment property much sooner.

It’s important to realise that you don’t have to pay your mortgage off at the minimum rate the bank sets for you.

In fact, your mortgage will be much, much cheaper if you make higher repayments to pay it off more quickly.

This is because additional repayments reduce the size of your mortgage, so you’ll pay less in interest. Because you’re paying less interest, more of your next payment will go towards reducing the size of your mortgage.

This has a compounding effect.

The lesson? Increasing your mortgage repayment by a little can have a significant impact.

Let’s look at an example.

Let’s say you’re paying off a $350k mortgage, which is on a 30-year term at 2.55% interest.

Your minimum repayment will be $321 per week.

At that rate, it will take 6 years until you’ve paid $50k off the mortgage.

Add that to the useable equity in your home that you have today, and it gives you the $100k you need for your first investment property deposit.

But let’s say you’re a little more ambitious and you can actually afford a mortgage repayment of $500 a week.

That means you’ll pay $50k off your mortgage within 2.8 years, so you’ll get into your first investment property over 3 years early.

It’s clear. Paying your mortgage off more quickly is a powerful strategy.

That’s not just because of the compounding effect of paying less interest … but also because each dollar you pay off your mortgage is an extra dollar towards your investment property deposit.

How Do I Put This Strategy Into Practice?

If you want to put this strategy into practice, there are two things you can do.

If you’re about to refix your mortgage interest rate, you can:

• Ask your mortgage broker (or your bank) to increase your repayments to a level you’re comfortable with, or
• If you are more advanced, set up a portion of your mortgage on a revolving credit and make your extra payments into this account.

If your next interest rate refix is a little further away, that’s OK.

Most banks will allow you to pay off an extra 5% against your mortgage each year without acquiring penalties.

In that case, allow your extra ‘payments’ to accumulate in the bank account the bank takes the mortgage from. Once you have a few hundred or thousand dollars in there, call the bank and ask them to transfer that money against your mortgage.

Even if you have a mortgage broker, you can call the bank directly. It’s a simple transaction, and the mortgage broker will have to contact the bank anyway.

#2 – Wait for your property to increase in value

The second strategy is very passive … wait for your property to increase in value.

That might not sound like a lot, but it can have a significant impact.

Generally speaking, for every dollar your property increases in value, you can borrow an extra 80c to use as the deposit for your next investment property.

So, if your property increases in value by $25,000, you could typically borrow an extra $20,000 for your next investment property deposit.

Let’s run a forecast to see when the investor from our case study would be able to invest if using the capital growth strategy.

Over the last 20 years, the median house price in New Zealand has increased by an average of 7.5% each year (Oct’ 2000 – Oct’ 2020).

But let’s use a more conservative figure in our model and say their property is going to increase 5% per year.

We already said the property was worth $500k. So, if we project that the property will increase in value by 5% each year, in 1 year the property is forecast to be worth $525k, then $551, and $579k in the third year.

Even if your mortgage stayed the same, you would be able to get into your first investment property after 3 years, with a total of $113,050 useable equity within this property.

Of course, in reality growth in property values is never that smooth, and you also have to pay off your mortgage.

So let’s combine paying off your mortgage with capital growth.

If you just make the minimum repayments against your mortgage, as described above, then you would be able to get your first investment property in year 2, with a total deposit of $107,103.

But, if you made the higher $500 a week repayment, then you’re not far off after just the first year. You could then use another of the strategies or look for a slightly more affordable investment option and have the first investment property sorted after just 12 months.

This is where using multiple strategies at once can help you get into your first investment more quickly than if you only used one.

To use the capital growth strategy, you need to own a property that is going to increase in value soon. And, of course, you need to already be on the property ladder.

#3 – Renovate your property to increase its value

If you prefer a more active strategy, then renovations may be right for you.

When you do-up your property, you’ll increase its value and be able to borrow more against it.

Exactly how much your property increases in value is more art than science.

But generally, if you spend $1 renovating your property, you should aim to increase its value by $2.

Spending $50k to renovate your property? Aim to increase its value by $100k.

Continuing with the case study, say the investor borrows $50k against their home to fund a renovation project.

Based on these targets, we would then aim for the property to now be worth $600k.

The mortgage has also increased by $50k. So, the net effect is that the investor can now borrow up to $80k against their property.

That’s $30k more than they could previously … and they’ll also have a newly renovated house.
To use this strategy, you’ll not only need to own your own property but also one that is worth renovating.

For instance, you wouldn’t want to spend $50k renovating a property if it only increases the value by $50k. That won’t help you in your journey to get the equity to invest.

How do I put this strategy into practice?

To start, you need to get a sense of whether a renovation project on your home is profitable.

Go to open homes in your area to compare properties that have recently been renovated with similar properties that have not.

Ask yourself:

• What are they selling for?
• What’s the price difference between the two?
• And how much would it cost to make my property like the ones that are worth more?

This isn’t because you want to sell your house; it’s just to give you a sense of whether the renovation project is worth doing.

If renovating property is new to you, you can also speak to the real estate agents at these open homes.

An agent who is active in your local market can easily give you a sense of the value uplift you would expect from renovating properties in your area.

You should also consider which parts of your property can be renovated profitably.

Typically, investors will start repainting walls and cabinets, replacing carpets, installing new light fittings and switches, and improving kitchens, bathrooms, and landscaping.

These cosmetic renovations tend to give the highest value uplift while also being the most cost-effective.

Once you have finished your renovations you’ll need to pay to get a registered valuation so the bank will lend against the property’s new value.

#4 – Use other people’s equity

Strategy No. 4 involves using other people’s equity to invest.

Just like you can use the equity in your own home as the deposit for an investment property, you can use the equity in other people’s homes too.

This generally involves the generosity of a close family member. That’s why this strategy is also referred to as ‘the bank of mum and dad’.

There are a few ways you can set this up. Often you might take out a joint loan with your parents against the equity in their house.

You would then use that loan as the deposit for your investment property. Then, once you have a tenant, the rent would be used to pay for the additional loan.

To use this strategy you’ll need your family member to:

1. have equity within their property that you can use, and
2. they’ll need to be willing to help you in this way.

Some people don’t like talking about this strategy. They think “my parents never helped me” or “I wouldn’t want a house my parents paid for”.

That’s OK. Like all the strategies on this list, it won’t be for everyone. But it will be an enormous help for the people that can and want to use it.

When using the bank of mum and dad, you’ll want to make sure they’re protected.

#5 – Set up a regular automatic payment to save the extra bit you need

If you’ve got through the first four strategies and don’t quite have enough to invest yet, that’s where you might set up a savings scheme.

Let’s say that you’ll need an extra $10k deposit to get started. That’s where you could set aside enough money each week to save that extra bit.

Say you save $200 a week. After a year (at 2% interest) you’d have $10.5k to use for your first investment property deposit.

It’s simple. It’s obvious. But, it works once you set it up right.

If you are going to use this strategy, the key is to set a definable goal that you can work towards, e.g. I’m $10k off, so I’ll put aside $200 a week to get there within 12 months.

After that, set up another, separate bank account with a bank you don’t use for your everyday spending.

Then, set up an automatic payment that goes out of your regular spending account and into your new savings account the day you get paid.

That way if you can’t see the money you’ve saved when you log in to your everyday banking app, you won’t be tempted to transfer money out. That stops you from spending what you’ve saved.

Which strategy is the right one for me?

Not every strategy on this list can be used by absolutely anyone.

In fact, there may be only one or two strategies on this list that apply to you. That could be because your property isn’t able to be renovated, or you don’t own your first home yet.

Still, because we work with first-time investors every single day here at Opes Partners, these strategies are the ones most Kiwis will use if they’re not yet ready to invest just yet.

If you’re really keen to become a first-time property investor, pick the strategies that apply to you … and actually implement them.

Only by taking action can you get closer to that goal of becoming a first-time property investor.