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Ryan Smuts: How much money does it take to become a property investor

Friday, September 04, 2020

IMAGE CREDIT: ADOBE

We meet clients regularly who are looking at getting into property investment and are wondering how much money they need to get going. There are many answers to this question. Much will depend on your intention and financial position. That said, here are some considerations to help you arrive at the appropriate range.

  1. If you are buying properties for the first time, you will be pleased to know that right now is perhaps one of the easiest markets for new entrants for a long while. There are no LVR restrictions (subject to review in May 2021) which mean most major banks are open to lending up to 80% LVR on a property. You’ll need to come up with the other 20% of the purchase price. (At the time of writing, KiwiSaver cannot be used for investment properties).
  2. If you are looking at more specialist properties (multi-units, smaller apartments, leaseholds etc), the LVR may be reduced so you’ll need to come up with a higher deposit. In many cases, 30%-50% depending on the nature of the property. Some properties are so unique that banks often wouldn’t lend anything on them at all.
  3. If you already own a property with useable equity, you can use that to fund the deposit on another property. If that is the case you won’t need to put in any of your own cash forwards the next purchase. For example, you want to buy a $500K property and you already have a $750K property owing $500K to the bank ($250K equity), this is generally how you would tackle it:
    • Get a loan for 80% of the purchase price ($400,000), secure the loan against the new property;
    • Top up your original loan to 80% of the property’s $750K value ($600K), off-setting it against the existing loan will leave you with $100K accessible equity. You can then draw down this as a loan to cover the $100K deposit required.
  4. If you’re looking at purchasing an owner-occupied property, you can get in with even less of a deposit. There are two main scenarios here:
    • If you’re looking for standard bank lending, at the time of writing, lenders are offering max lending of 90% LVR – which means you need to come up with a 10% deposit. If you’re purchasing for let’s say $750k, this might mean you need a $75k deposit. The plus-side here is that KiwiSaver can also form part of the deposit – so you don’t only need cash.
    • If you’re looking at the Kainga Ora First Home Loan scheme, you may be able to get in with as little as 5% deposit. If you’re buying for $500k this might mean as little as $25k deposit is required. There are certain restrictions to this around income caps and house price caps in certain areas, so the link above will help clarify this. The more difficult part is meeting serviceability criteria for a 95% loan, and not all lenders offer this product, but it is worth digging into if it sounds like something suitable for you. As a rule of thumb, if you’re wanting to get closer to the higher price caps in the larger town centres, you often will need two applicants to meet the servicing criteria.
  5. All of the above is still subject to meeting servicing criteria, but assuming you have the equity/deposit side sorted, you’re definitely at least half-way there!

  6. Another final option if you’re short on cash, equity and/or KiwiSaver, is to joint-venture. There are several options here in terms of going to ‘The Bank of Mum & Dad’ or even looking at joint venture partners. Perhaps if you lack capital or the ability to get finance, you can serve as the joint venture partner who provides skills or expertise to make a deal work (such as finding the deal in the first place), so that you’re bringing your worth to the table. This often works better in short-term arrangements where properties are bought to renovate and sell, and each party may walk away with an agreed-upon profit margin. Once you have enough cash, one of the previous options above may work for you to begin the process alone if that is your preference.
  7. Lastly, in terms of ongoing reserves for property, I’d suggest having savings aside for any unforeseen maintenance issues – or even vacancies. I’d personally recommend having around 3 months’ worth of rent leftover at least. I’ve recently had a situation (personally) where a property of mine was vacant for several months while we tried to get a tenant out, and following that the property was contaminated with meth – which took a long time to remedy with the COVID-19 lockdown in between as you can imagine.

As always if you have any questions or we can assist further, feel free to get in touch at ryan@krispedersen.co.nz


ABOUT THE AUTHOR

Ryan Smuts 

Ryan is a Key Accounts Manager at Kris Pedersen Mortgages and Insurance as well as a property investor. 

 

 

 

 

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Mathieu Holt- Managing Director, The Tenancy Practice Service & TPS Credit Control
Through the Association I found the channels and methods to fund the purchase of property I never dreamed about. Grant Brown

All round it has been one of those things Neil and I felt was really worthwhile belonging to. We have learned so much it has just built our confidence in what we are doing.

Janice Bieleski
I read two articles in the monthly magazine that saved me over $5,000. That is my membership fee for the next 26 years and I am sure I will learn a whole lot more! John Duncan
Fantastic organisation. The networking opportunities are brilliant and provide us with information and opportunities that cannot be obtained anywhere else. We learn something new at every meeting and we've been in this game for nearly 20 years. Pauline and Gyanen Kumar

I find the information obtained from various APIA meetings very useful in guiding my own property investment and rental management.  I also enjoy the networking opportunities with like-minded investors.  I am inspired by other investors’ success and find the more experiences and knowledge that I share with others, the more confident I become.  

Thanks to all APIA event organizers and administrators for your brilliant work. 

Stella Shao

I like talking to people and learning from their experience because it gives me the confidence to invest well. I think it is a knowledge thing. I now know I am doing things the right way.

Stephen Weatherall

My APIA membership has become a total success.

Every time I attend a monthly or regional meeting I come away with so many useful and positive tips that have added value to my property investments and management.

Not only that, the website is a great place for practical advice and useful information. It has now evolved into an important resource for my business.

Talk about value for money! The discounts I have been getting at Bunnings when I present my APIA membership card have more than paid for my annual subscription!

Tim Duffett, Plan A Investments Limited