So you’ve found that perfect property in the perfect neighborhood and you know it’s a keeper. There’s only one problem…You don’t have the finance to actually buy it. This is a serious problem for a lot of investors out there. Whether you’re a first-time buyer or you have a multi-million dollar property portfolio, the financing can become a problem at any stage during your property career.
Now, I’ve read an incredibly powerful thing a while ago that says, don’t think about whether you can afford it, but rather think of how you’re going to afford it. I have adopted this as my motto for property investing. A lot of people see a property they want to buy but realizes they can’t afford it, so just gives up on the sale. Rather than giving up, you should use one of these 4 ways for financing an investment property that I will discuss below.
This is probably the most common type of financing for property investment.
Why do we make use of bank financing? Well, the answer is simple. We know the banks and feel comfortable dealing with them. They also offer better interest rates than most other financing methods.
When doing your bond application at your local bank, they will look at a few things before they even consider offering you a loan. They will look at your current income and analyze whether or not you will be able to carry the bond repayments with your salary alone, after all your expenses. Normally you will be able to afford a bond installment of around 30% of your salary. Now, this is not much, especially if you are a first-time buyer. If your salary alone falls short of the amount that you need, you can always look to involve a friend or combine your salary with your spouse’s. Just remember when buying with a friend it can have other problems which we will discuss at another time.
Just remember when using bank financing, the first property’s bond approval might be relatively easy with good interest rates, but as soon as you’re looking at the second or first property, your interest rates could become higher and the chances of you getting 100% cover are almost zero.
Ask your family
Now I know a lot of you are not going to agree with me, but this is a legitimate way of financing an investment property. I know this because I speak out of personal experience.
When I bought my first property, I didn’t have the salary in order to get bond approval by myself. So what did I do? I implemented my motto and thought of how I am going to afford this. With my dad recently retired, I knew he would be keen on an investment so I gave him the ins and outs of the investment and he liked it. We decided to go into the deal with a 35% to 65% share split. I own 65% and he owns 35%. We still have this property and it is only showing positive results. Within the first year and a half, the property increased in value by over 26%!
Now just imagine if I didn’t make use of this financing technique. I would’ve probably given up on investing just because I couldn’t afford it (alone) and then missed out on a lot of great deals.
An angel investor is basically someone who invests in start-up businesses. This capital that is invested can be a lump sum amount that is invested or an ongoing injection that helps the business through the starting stages. In return, an angel investor would normally expect ownership equity in the business or convertible debt.
Angel investing might seem like a good first choice, but you must remember that it can take quite a bit of time. You cannot simply submit all your documents and expect them to come back to you with a yes or no. You will have to find the right investor in your sector (property investing) and then you have to present a business plan with your projections etc.
This can be a very daunting task and if you are new to this, I will suggest that you start off with the banks. Only once you are more familiar with investing and angel investors I would say you can think about making use of angel investors.
This is my favorite financing strategy of them all. The only downside is the fact that you need property in order to access equity.
What is equity? Equity is your current market value of your property minus what you owe on your mortgage. So in other words, if your current market value of your property is $700,000 and you still owe $500,000 then you’ve got $200,000 equity.
This is a great thing to make use of if you’ve got an existing bond. You can now use that extra $200,000 to invest in your next property. you might be paying off on your current bond a bit longer or pay a bit more interest, but if you’ve got a good interest rate, this is definitely worth it to me.
In conclusion, if you’ve found that perfect property, don’t let financing stand in your way of buying it. A lot of people give up so easy when they realize they can’t afford it. Don’t be one of them. With these four ways for financing an investment property, you will be able to afford that one in a million deal.
Remember, don’t think of whether you can afford it, think of how you’re going to afford it.