How To Buy A House With A Small Deposit (Ep246)
You don’t need a massive deposit to buy a house. Let me show you how to buy a house with a small deposit.
You can buy a property with a very small deposit. It is going to limit your options and it’s going to be more difficult, but it is actually possible. Therefore, today I want to show you ten ways that you can buy a property with a small deposit. There are many reasons you may have a small deposit. You may be at the beginning of your investment journey and just starting to save. You may have received some commission which has happened to me in the past or maybe you just don’t earn enough money and so you have not been able to save a certain amount of money. There are many different reasons that you may have a small deposit but it is possible for you to go out and invest, so I want to share some different methods with you that you can use to invest using a small deposit.
The first one is to save just 5%. A lot of people go out and they aim to save 20% of the purchase price of the property. For a $500,000 property this is saving up $100,000. I’m amazed at how many people can actually do this because to me with two kids, one on the way, self-employed working for myself that would be extremely difficult to save that amount of money. I’ve been able to save a deposit, but a 5% deposit of a cheaper property. So maybe rather than trying to save 20% just use 5% of your deposit to purchase the property and that way you have a smaller deposit and you can get into the property market.
The second method is to look for a cheaper property. So rather than trying to invest in a half a million dollar property or an $800,000 or $1M property why not look at a cheaper property. You can use the two-hour rule which is my rule that said if you live in a capital city drive two hours in any direction and you are highly likely to find an affordable property. In Sydney for example two hours north in the north of the central coast and you can find a property there for $200,000/$250,000 houses, two bedroom houses for under $300,000. By lowering the purchase price of your property, thinking of it as an investment rather than a house that you are going to live in or your dream home, you can lower your deposit that way and invest with a small deposit because you don’t need enough to buy a house. If you go even further out to somewhere like Murree which is northwest New South Wales, there are very high rental yields out there by the way and you can actually purchase properties under $100,000. There are properties out there for under $100,000 and 5% of $100,000 is $5,000 people and that is not a huge amount of money to save. It is difficult for a lot of people but is within the realm of possibility.
The third method you could use is you could go halvies with another investor. You could invest together and combine your deposits so that you have enough to purchase a property. If you don’t have enough by yourself, this could be a good option to actually invest with someone else, pool your resources, combine your deposits and purchase a property through a joint venture. Just be careful when doing this because it may affects your lending in the future because you will have the full security of that loan against your name even though you only own half of the property. So, can this affect serviceability down the line? You can speak to your mortgage broker about that and learn about that really easy. Just go to www.onpropety.com.au/mortgage.
The fourth thing you can do is use your super to buy it. You can invest in property using your superannuation. Now, it’s very unlikely and probably almost impossible to purchase your principal place of residence using your super and that is not something that I would ever advise. If you are going to invest using your super you will need to see a professional accountant in order to get all of that set up and to get it done. I can’t provide any advice on that but a lot of us have money in our super that is just being invested passively in the stock market by someone else. I don’t know, my super is with A & Z and just happens. I don’t even know what it’s invested in but we could potentially take that out and if we have the borrowing capacity we could use that as a deposit for an investment property. Obviously you are not going to be able to access any of the benefits of that property until you are of retirement age and through all the super laws be able to access that, but it could get you started and it could get you into the property market if you want to be in it and obviously you can benefit from that down the track.
Tip number five is to consider a dual occupancy for your home. This method is basically to help you purchase a property that you wouldn’t actually be able to afford in terms of the repayments. Maybe you want to save a larger deposit because that’s going to lower your mortgage repayments because you won’t have as big of a loan and so by investing with a smaller deposit in a property then you can rent out a portion of that and then the repayments are going to be less for you because someone else is going to be contributing money towards that. This doesn’t really help you with investing with a smaller deposit but it does help if what’s holding you back is the serviceability of the loan and being able to live and afford to pay that loan on the wage that you are on. Banks may lend you money but realistically it might not fit into your budget but by investing in a dual occupancy property where you can rent out part of it to someone else and get an income, for example, a granny flat, then you could potentially get into the market and be able to afford it.
Tip number 6 is to buy below market value. By buying a property below market value, you may be able to finance your property in such a way that you don’t need to put a huge deposit into it. Most lenders will lend based on the valuation or the purchase price when it is low not necessarily whatever’s hi how so many a higher valuation campaigns you purchase price, whatever is lower, not necessarily whatever is higher so if you even get a higher valuation compared to your purchase price they might still base it on the purchase price but maybe there are some lenders out there that could help you and could help you invest based on the valuation of the property because you are getting it under market value. You will need to speak to your mortgage broker about this. There is also the option that in the future, in the near future you can get that property revalue, get an equity loan and pull some money out. You are therefore investing with a larger deposit but then down the track within the near future you are actually revaluing that property at the price that it’s actually valued at and getting a loan based off that which allows you to pull some money up and be back to where you were on a smaller deposit.
Tip number seven is to consider just buying land. Therefore rather than trying to buy land and a house which can be obviously quite expensive while purchasing just the land itself that can be a lot cheaper. I remember when I was on the Central Coast looking at properties to purchase a two-bedroom house, you are looking around $250,000 was kind of the bottom end of the spectrum for two and three bedroom house. However there were blocks of land available in the area for $99,000. There were others for $120,000, $130,000, $140,000. This was therefore for half of the price or less than half the price just to purchase land. Obviously you can’t live on land, you can rent out land so there are some negatives that come with purchasing just land, but if you want to get into the market and you want to purchase some real estate, it is going to be cheaper to buy land which means you only need a smaller deposit.
Number eight is to invest in a super cheap property. I covered this in the last episode 245 when we talked about investing with no deposit and look at purchasing a super cheap property. I found properties on gumtree.com.au. I was just looking around for fun – $3,000 for a block of land. This block of land didn’t have any sewerage, no electricity, it didn’t have a road going out to it but it was still $3,000 for a block of land. I’ve seen other blocks of land with roads going out to it and with the ability to connect electricity and sewerage and potentially live on it for $10,000. It is still in the middle of nowhere but still $10,000. I have seen others in smaller towns for $30,000, $40,000, $50,000 for blocks of land. I have seen houses, very run-down, mind you, for as little as $40,000 and in areas like Murree which ins North Western New Sough Whales you can actually but houses that ate rented out for under $100,000. So by looking at a super cheap property $100,0000 or less you can potentially get into the market with a very small deposit.
Tip number nine is to use rent towards your deposit. Some lenders at the moment are allowing you to create the money to combine your deposit with what you’ve been paying in rent towards your deposit. So if you have been paying rent month in month out and never be behind and you got a rental contract over twelve months then chances are you might be able to use rent as part of your deposit. You need to go to your mortgage broker and work out all the terms and conditions with this. I remember talking to St. George and that were saying to me you can combine your deposit with the rent that you have been paying over the last year. Therefore paying $300 or $400 a week rent, that’s $15,000 or more, you can combine that towards your deposit which helps you lower lenders mortgage insurance that you have to pay on the property and help you get approve faster because it can move you from the 5% deposit, you actually have up to 10% because you are combining the rent you have been paying over the last year a well. I looked at that and say well if you have been paying rent consistently on time chances are you going to pay your mortgage consistently on time and you are less of a the risk for us. That is an option out there so speak to your mortgage broker and if you don’t have a mortgage broker go to www.onproperty.com.au/mortgage to check out Brad the broker details who is my broker and who I recommend. He can give you a call or you can call him. He is a bright guy and really hustles for you.
Tip number ten is to use an additional small unsecured loan. This is not something that I can recommend because getting extra loans and especially ones that are unsecured and at a higher interest rate can be extremely risky to invest in property. If you don’t have enough money to purchase a property, maybe it’s best to wait but I have heard of people being able to purchase a property and get a property loan but then also get an unsecured loan of a small amount to cover the portion of the deposit that they didn’t have and that they needed to go ahead and invest.
I just want to say as I’m closing this off that it’s highly unlikely that you’ll be able to use develop a kickback or cash back options as your deposit. So when you are driving pass and if you go to a state and they say buy a property and you get $20,000 cash back, you very rarely can use that towards your deposit. Almost always the banks are going to factor that into the purchase price of the property. They are going to see that on the contract and they are going to negate that cash back offer, because really it’s a marketing ploy to help you to buy a property and get you over to buy a property that’s probably overpriced and so they’re not going to allow you to use that cash back as a deposit because you still represent a higher risk for them. So just be aware if you see a developer cash back or if you see kickbacks that you can get, the bank’s probably won’t recognize that. Again, talk to your mortgage broker about that because they will know all about it.
There you have ten ways you can purchase a property with a small deposit. If you have a small deposit and you want to get into the market I really encourage you, go and see a mortgage broker, see what our options are out there for you and then always do your research so that you can invest wisely and invest towards your financial future. If you haven’t set financial goals go to www.onproperty.com.au/day1 and check out my episode about finding you financial true north and combining your financial goals with your lifestyle goals so you can get something that really makes sense to you. If you want to get access to my checklist to help you understand how much of a deposit you need to save and get you on the path to saving your deposit go to www.onproperty.com.au/save and you can enter your email and get access to that absolutely free.
Until tomorrow stay positive!