There are a lot of numbers you need to consider carefully if you plan to invest in property when money is tight.
Firstly there are numbers related to the purchase price you can afford. This includes the deposit, stamp duty, legal fees, pest & building inspections and a host of other things and usually comes down to how much savings or equity you have.
Then there are numbers based on projects you might intend on doing such as renovations, extensions, subdivision or development.
Finally there are numbers related to holding the property. This includes things like servicing the mortgage, management fees, rates, water, repairs and depreciation. On top of all this you need to allow a safe margin for error – renovation costs may blow out, interest rates may increase, tenants may fall behind on rent or the hot water system could need replacing.
It all sounds a little scary to the first time investor and even worse if you are on a tight budget. But there are some factors that you can look at which will make the investment much more likely to be profitable and less risky.
A small amount of capital growth soon after purchasing a property can place a safety net under your investment. So if you were to lose your job for example and could no longer make mortgage payments the property could then be sold for more than the cost of buying due to the capital growth. You would effectively get out of the deal with an excellent learning experience and hopefully no financial loss.
To ensure you have this kind of safety net you should find a market with potential for immediate capital growth and one that has just recently started showing signs of capital growth
So it’s important to not just perform duedilegence on your budget but on your location – to find a decent demand to supply ratio will also strengthen your property if you need to sell quickly. Ideally you want to sell quickly into a market that has a very short ‘days on market’ figure.
It is important to speak with an agent that knows the market (do your own research also) find out which areas are set for growth and give yourself time to find the right property. Wait for that forced sale or super keen to sell vendor. This is where you might pick up a property for less than market value and have that instant capital growth.
Make sure the area is a desirable one that people are going to want to rent in. There is no point in picking up a bargain that no one wants to rent due to the location / presentation of the property. Check against similar properties in the same area to see what rent they are achieving and if yours will achieve enough to cover (and hopefully exceed) your proposed mortgage payments.
If you can secure an investment property where the rental amount received is substantially greater than your mortgage, rates and water expenses then there is no reason that you shouldn’t be able to invest when the rest of your money is tight.