How to invest in property as a single parent

Information verified correct on December 4th, 2016

We get down to the nuts and bolts of how you can invest in property as a single parent.

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.

Natalie's silver-lining

single mum investingAlthough Natalie recently divorced from her husband, she was fortunate enough to receive $180,000 in cash from the property settlement.

With a three-year-old son, James, Natalie works part-time as a nurse and receives a weekly income of $1,050, which is a summation of her wages and the Centrelink child support benefit. Nearly all of Natalie’s income is used for rent and living expenses for her young family.

Having researched the market, Natalie decides she’d like to put the $180,000 towards a long-term property investment. She’s after an income-producing property that will provide positive cash flow with the potential of offering capital gains further down the track.

With no existing debt or credit cards, Natalie has a steady employment history and a good credit rating. However, because of her limited income, she’s sceptical about her ability to manage an investment property and meet her monthly repayments.

After speaking with some local agents, brokers and property managers, Natalie draws upon the expertise of a range of professionals to guide her through the decision-making process.

Steps involved in property investment as a single parent

1. Identify borrowing capacity

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.

You can use our borrowing capacity calculator here.

2. Weigh the pros and cons 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.

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.

About the pros and cons of property investing here.

3. Determine 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

working dadResources

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. Recruit a team

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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Why invest in property?

Investing in property is a way of building wealth that can provide your family with financial security for the long term. Here are some of the advantages of investing in property:

  • Stable returns: An investment property can generate fixed returns through the form of steady and regular rental income, which can act as a secondary income stream for your family.
  • Capital growth: The value of your property is likely to appreciate over time, and a well-located property could mean that you benefit from capital growth over time.
  • Tax benefits: If your investment property is negatively geared, it may provide tax benefits by reducing your gross income. You can claim depreciation for a range of expenses associated with the investment property, such as agent fees.

What are the risks?

  • single mum 2 kidsInitial 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.

What upfront and ongoing fees I should consider?

Upfront costs

  • 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.

Ongoing costs

  • 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.
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Tips for single parent investors

Before investing in property, there are several things to consider.

  • Risky borrower: Whether you're unemployed, receiving child support benefits or working part-time, single parents generally have less income to service an investment mortgage. With an unconventional income source, single parents are generally viewed as being risky borrowers. This means you need to show the lender that you’re capable of meeting your mortgage repayments and managing an investment property by showing evidence of your savings history or credit file.
  • Low-risk strategy: Naturally, single parents are cautious about investing and often pursue a low-risk investment strategy to mitigate any financial loss that could result from a poor investment. While there’s no “one size fits all” strategy for single parents, it’s important to carefully consider the degree of risk you’re comfortable with when it comes to your investment. A low-risk strategy means conducting thorough market research and consulting professionals to ensure that you invest in an area and a property type that’s likely to generate a high yield and long-term capital growth.
  • Exit strategy: As part of your low-risk strategy, you may want to consider properties with an exit strategy in case you need to sell the asset suddenly. For example, if your situation changes and you need to suddenly cash in on the property, it could take a while to sell. This could be an issue if you urgently need the proceeds of the sale, which is why you need to be careful about the area you invest in to ensure that there’s enough demand for the property type.
  • Market research: As a single parent, you should ensure that you’re well-versed in investment strategies, trends and property types, as well as tax implications to ensure that you get the most out of your investment. You should come up with a checklist of all the criteria and factors that your investment needs to satisfy. For example, you may need a property that will generate 3-5% rental yield, or a property in an area with positive buyer sentiment and demand.
  • Trust the experts: You should speak with an accountant or property specialist about your investment approach and ensure that your financial planning is oriented towards the long term. Try to detach yourself emotionally from the investment purchase and build a clear understanding of your goals for your investment and your family.

Single dad sold signHow 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).

Property insurance quotes

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.

About the tax benefits of property depreciation.

What’s negative gearing?

Negative gearing occurs when the annual cost of your investment property is greater than the return you receive from the investment property.

Negative gearing.

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Images: Shutterstock

Belinda Punshon

Belinda is a journalist here at finder.com.au. Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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