How to invest in property as a single parent
We get down to the nuts and bolts of how you can invest in property as a single parent.
7 tips at a glance
It goes without saying that you’ve got your work cut out for you as a single parent. With limited time and financial resources, entering the property market and deciding on an investment approach that will support your family can be daunting.
When it comes to property investing, knowing a few tricks of the trade can go a long way in helping you achieve a cash-flow-positive property that will help you realise your investment goals without harming your financial security.
1. Work out how much you can borrow
Before you invest in property, you should estimate how much you can afford to borrow for the investment. Speak with an accountant, financial planner or mortgage broker to get an idea of how much you need to borrow and what your monthly repayments could be.
2. Consider the risks of investing
You need to carefully consider the benefits and drawbacks of property investing and decide whether or not this is suitable for your financial situation and your family. Most importantly, you need to determine the amount of risk that you’re comfortable with when it comes to your investment.
These are some risks you should think about:
- Initial and ongoing costs: Along with the purchasing costs of an investment property, you need to consider the ongoing fees associated with managing an investment such as insurance, council rates, repairs and maintenance, and water rates.
- Rent-free periods: As an investor, you run the risk of having rent-free periods, which means you need to have a buffer of funds as a precautionary measure. During times when the property is unoccupied, you’ll forgo rental income, which could make it difficult to meet your mortgage repayments and other ongoing fees. Consider whether your investment property may be subject to changes or fluctuations in demand and think about how you can manage this.
- Difficult tenants: Tenants could potentially damage your property, refuse to pay rent or vacate the property without giving you adequate notice. You need to form a contingency plan in the event that things go wrong. For example, you can insure your property and contents to mitigate this risk.
- Property value decline: The property market goes through ebbs and flows with different markets having peaks in property prices and then falling property prices at different times.
Consider how you can mitigate the risks involved when investing in property, such as taking out an insurance policy, researching the area thoroughly, or seeking advice from a mortgage broker.
3. Determine your investment goals
Once you’ve decided that you’d like to enter the property market, you need to clearly define your short-term and long-term investment goals.
Ideally, you should make your goals specific and know exactly what it is you want to achieve from the investment property. For example, in the case study above, if Natalie wants to send her son to childcare next year, she may need at least $150 per week in rent right now, but what rental income will she need from the property in future if she wants to send her son to a private school 10 years from now?
4. Research the market
Familiarise yourself with a range of property-investing resources such as PropertyDATA.com.au, Residex, Real Estate Institutes, realestate.com.au, RP Data and Onthehouse.com.au to learn the ins and outs of the property market, different property types and investment strategies.
Costs and return
Learn about the purchasing costs, holding and maintenance costs, as well as the responsibility of having an income-producing asset, and determine what return you need to cover the expenses of the property. You can do this by conducting a cash flow analysis with a financial planner.
Location and property type
A well-chosen suburb and property type are likely to deliver greater return, not only in the form of capital growth but also in the form of rental income.
If the suburb of the property is well-thought-out, you’ll be more likely to gain higher returns from the property.
The following are some points to consider when selecting the location for the asset;
- Is the suburb reliant on more than one industry?
- Is there likely to be population growth in the next 5, 10 and 20 years?
- What infrastructure plans are in the pipeline that could attract residents to the area?
- Are residents increasing their income over time?
- Is the suburb in close proximity to amenities such as the CBD, schools and shops?
When choosing the property type, you should consider the following:
- Is there sufficient demand for the property type in the area?
- How appropriate is the property type for the demographic of the area? For example, if the suburb has older residents, perhaps it wouldn’t be wise to purchase an apartment without wheelchair access.
5. Get help from the experts
Reach out to mortgage brokers, lenders, tax specialists, local agents and property managers to broaden your understanding of the investing process and to combine their knowledge and perspectives.
Network with other single parents involved in the property market and listen to guest speakers or influencers that can offer advice.
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What upfront and ongoing fees I should consider?
- Deposit: You should generally come up with a 20% deposit for an investment property so you can avoid paying lenders mortgage insurance (LMI), however some lenders will allow you to borrow up to 95% of the property value, which may mean you only need a 5% deposit.
- Establishment fee: Most lenders will charge an establishment fee that covers the administrative costs of setting up your loan, so ensure you have enough funds to cover this.
- Lenders mortgage insurance (LMI): If your deposit is less than 20% of the property value, you may need to pay LMI, which can either be paid upfront or capitalised into your repayments over the life of your loan.
- Stamp duty: The amount of stamp duty payable will depend on the purchase price of the property. You should contact your local state office of revenue to get an estimate of the stamp duty tax on your investment.
- Legal charges: These fees cover the legal transfer of ownership when you purchase the property. This cost is normally determined by an external solicitor or conveyancer.
- Insurance: You’ll need to pay building and landlord insurance, which will protect you from any unforeseen circumstances (such as fires or floods) or if a tenant refuses to pay rent.
- Account-keeping fees: Your investment home loan may incur ongoing account or maintenance fees, so make sure you check this when comparing different investment home loans. Opt for a lender that charges minimal ongoing fees.
- Council rates: As the landlord, you’ll be liable for council rates, which will be set by the local authority.
- Mortgage repayments: Although your rental income from the investment property may cover most of your repayments, you may need to cover a shortfall.
- Utilities: You’ll be responsible for the bills of any utilities that are not directly associated with the tenant’s use of the property, such as sewerage charges.
- Repairs and maintenance: You’ll need a buffer of funds to cover unexpected repairs and maintenance required on the property.
How do you improve your chance of being approved by a lender?
As an unconventional borrower, you need to show the lender that you have the ability to repay the mortgage comfortably. It’s important that you do your research, carefully consider your investment strategy and manage your personal finances before applying for an investment loan.
Here are some ways that you can improve your chance of getting the “OK” from the lender.
- Reduce existing debt: The lender will review your credit file and any existing debt that you have against your name, so it’s important that you minimise any outstanding debt that you have to boost your desirability as a borrower.
- Build savings and deposit: Try to get into the habit of making regular deposits into a savings or transaction account to demonstrate your ability to budget. Ideally, you’ll want to complete a 20% deposit to avoid paying LMI, so you need to start saving early. If saving up a deposit isn’t realistic, consider alternative options such as a guarantor loan or equity home loan.
- Research your options: Compare competitive investor loans with minimal ongoing fees and competitive interest.
What government benefits are accepted as a source of income by lenders?
Each lender has different eligibility and serviceability criteria for investment loans. However, the following Centrelink benefits are generally recognised as a source of income by Australian lenders:
- Child support. You will need to provide documentation including bank statements showing your deposit history of the benefit, as well as a letter from your solicitor and Child Support Agency (CSA) confirming the status of the benefit.
- Family tax benefit. If you receive Family Tax Benefit part A and B, lenders will consider the age of your children or dependents before they decide whether this is an adequate source of income for your investment loan.
- Foster care allowance. Generally, this benefit type is accepted, but only as a secondary income source, so you’ll need to prove that you have another source of income within your application.
How can I protect my family from financial loss arising from the investment?
Building and landlord insurance is strongly advised, which can help protect you and your family in an unexpected situation (such as theft, fires or floods) or tenant issues (if a tenant vacates the premises without issuing adequate notice, for example).
What items can I claim for depreciation?
You can claim depreciation on newly purchased items, and you can deduct depreciation on plant and equipment items as well as building allowance items. You can also claim for building allowances for the construction costs of the property, such as concrete or structural work. Learn more about the tax benefits of property depreciation.
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