Low Income Investors and Impact of Current Lending Climate

Do you think it would be possible(realistic) for a person on $50,000 or less would be able to build a property portfolio in the current lending climate (excluding Sydney) going forward?

Factors like Interest Only Loans, LVR% restrictions, changing regulations etc. these being much more favourable to a lower income-earner say 5-10 years ago compared to now.

Obviously wage growth and ability to save is the key but say as someone on $40,000 - $50,000 with $30,000 deposit saved as a starting point in July 2017 with no dependants/assets/liabilities or debt. Would they be able to use the buy/reno/re-value/hold strategy that so many have utilised in the past?

 

It would be much more difficult but not impossible.

A $30k deposit won't go far, but if you buy using the FHOG stamp duty exemptions it can be possible, especially if building new, as you can also then boost your deposit with the $10k or whatever it is in your state. This can then become IP 1 when you buy the next one - buy this as an OO.

Saving a deposit will be the hardest thing, so buying new OO properties is the best way as the LVR's can be higher.

Servicing will make using equity to fund the next deposits more difficult, as will actual cash flow as both loans will have to be on P&I (most likely) until the LVR reduces to below 80%. This will make saving a bit more difficult.

So it'll definitely be slower, but not impossible.

 

Yeah the FHOG is only for new builds in my state (SA).

Ok so buying as owner occupier and renovating/adding value while living in the property would probably be a better strategy going forward. Then as you said reducing LVR to below 80%.

Guess it does not change the dynamics of the game, just the targets are a bit higher and timeframe will be slower.

 

More difficult than it was till the 90s when the bank wouldn't even consider a loan if you ddn't have 20% deposit?

And interestingly home ownership decreased in line with easy finance.
Maybe houses were more appreciated then.

 

Affordable Homes program is pretty nifty in SA - done quite a few of these purchases for clients who have used it as a quick way to get into the property market via reno, reval and rent out after being in the property for a while.

What to do to extend the capacity on a low income? Buy PPOR. Add value, continually reduce non deductible debt, debt recycle into purchasing property and or shares. Grow that income at a rate faster than expenses so lender stress testing impacts as little as possible.

To be honest for years now investors have been lazy with looking at their total financial picture. Setting up the most efficient ways to reduce costly reduce, growing income at a rate faster than debt etc has all fallen to the wayside in favour of just buying as many properties as quickly as possible without factoring in their long term cash flow position, how they actually intend to retire or how they will pay back millions in debt. It's a new age but like all others there will be those who take life by the horns and set themselves to be financially secure, and those make excuses.

 

Agreed saving the deposit will be tricky, servicing will be tight but it can be done.

I have a friend who did this. He earns $50k pa, saved $130k after living with his folks forever (I think he's late 20s) and bought a place for $350k. FHOG and stamp duty exemption both helped as well.

Consider any government backed low deposit institutions such as Keystart in WA, I'm not sure what the equivalent is in SA. You'll be paying a higher interest rate but if it means you can get in with $10-15k savings rather than $50k you could potentially buy a house years earlier.

 

On $50k per annum it would be extremely tough to build a portfolio. They'd have to have no (or very little) rent/boarding expenses, no liabilities and low living expenses as well as enough equity/savings to cover off the 20% deposit/costs on each purchase.

If they intend to buy a ppor then I'd assume that building a portfolio would be near impossible as that debt would erode their borrowing capacity quickly.

Cheers

Jamie

 

It can be done; but the Lifestyle sacrifices to save a deposit (and Loan servicing) would be too extreme for most people to bother.

If you were really, really dead serious and on a mission to start, you could; move in as a border in someone's house, or a bedsit, or if you are young; live at home with Mum and Dad for a longer time, or find a very cheap property in a boondocks area to rent with others or on your own....and; it may even need to be in another State.

Then; once you have saved the deposit; select a really cheap doer-upper property in a boondocks location to buy, move in and make the long commutes to work using public transport (or bike), live off next to nothing, smash the loan; and then use the equity to fund another similar cheapie for an IP with good rent returns....climbing the ladder to better properties.

How many folks these days could go without virtually all the technology, and all the first world lifestyle activities that we all enjoy and that everyone takes as a given?

Imagine; no I-Phone (maybe a $70 pre-paid for emergencies), no internet provider, no car, don't turn on heaters or aircons, no new clothes or new furniture at all, no restaurants, no takeaway food, take your lunch to work from home, no bottled water (tap water only), no movies, no Gigs or theatre or night clubs, no alcohol or cigs or tatts, scrounging for groceries specials each week, no holidays away except maybe a skanky caravan hire in a park down by the coast for a few days and cooking all your meals....add to all this; get a 2nd job to help add to the pie, and put every single cent of that 2nd job income into deposit savings - spend none of it at all..

Who would do that for a couple (or 3-5) years to save the required deposit, and then continue to do the same for maybe 5 more years in order to smash the Loan enough to then embark on an equity access program to fund the first IP?

This is the level of sacrifice it would probably require on that $50k income to do it...

The other factor not mentioned so far is with serviceability; what are the current cut-offs with the Banks as a percentage of a person's gross income for debt servicing?

 

Get a job in the remote north that provides accommodation and some living expenses. Amazing experiences to be had without spending a cent ( nowhere to go and nothing to buy). Work all hours and smash down debt. If there's two of you it's even more productive. We paid off a couple of mortgages doing this for 5 years. A couple of high yield IPs paid off could see you having $1k pw passive net income before you know it.

 

It can be done but you have to go into save mode for a few years living off just the basics to get that deposit up.

For example not that long ago (2005) I was at uni and had an income of 24k a year. I paid rent, food, share of bills and my HECS upfront. Still saved half my income so after my 3 year course had 42k saved (6k from high school job). First year out I just worked casual and made a whopping 33k a year. Saved about 18k of that so had a 60k deposit at age 22.

How did I live so cheap?
Rented a room in share house (wasn't even a bedroom, was dining room off kitchen that had doors) $60/week
Food was about $45 week
Bills about $20/week
$20 fuel
Rode a bike most places, didn't drink, didn't buy meals out.
So that's about 7.5k and the rest went to HECS

So excluding the HECS I could live off under 8k a year...

Bought property at 22 and had a 140k loan, had it completely offset after 5 years. My main income had increased to about 45k during those years. I did an 18 month stint working a second job (night fill and weekends) to really smash off the debt.

Was it worth all that sacrifice for a few years? I semi retired a bit over a year ago at age 29, Mrs will fully retire in 2019...yes it was worth it.

Now today is different, APRA happened. But it still can be done, lets just look at the deposit first. On a 50k salary that's about 41k take home. If I double the 8k a year I was living off to 16k living expenses that's still 25k savings potential today's money, but are you willing to sacrifice that much? People think it can't be done. We're a couple and can live off about 25k a year, that includes some dining out, holidays, a couple of cars and toys, some healthier food than my uni days.

Now the serviceability part. The new environment is a bit tougher but with a buy renovate hold strategy it could still work. You have to focus on cash flow properties now more than CG in order to build the portfolio. The pace may be slower than in the past but you can definitely do it.

Happy investing.

 

Yes, this is true. That's exactly how I started out in property. I was living in a cheap shared house, cheap car, cheap phone, no Internet. I didn't eat out, drink, smoke or go to movies. I didn't find it tough at all. In fact, 12 years later I still don't do most of those things.

 

Nothing we have to worry about here anyway. Minimum household income to register on this forum is 200k.

 

One thing to add is that the sooner you start the better. The banks take your age into consideration and will not do a first home loan after you reach a certain age. I think it is 50??

 

Recently had an argument with this "Financial Advisor" about it not being possible on less than $100k p/a

 

Oh dear!

 

And the Financial Planning Industry cant understand why we don't take them seriously.

 

It might be a good idea that FP's should have to disclose their own financial positions before they can hang the shingle?

I only went to one FP in my life several years ago - I wanted property advice - he tried to sell me a shares plan..

Of course; our FP's here are excluded from this anecdote - we have a terrific bunch here who walk the walk.

 

Stunningly stupid.

 

It's certainly doable.
I saved $150k on a $50k income by sacrificing heaps. Lived with the parents for a while until I couldn't stand it anymore.
Then moved 500km west to Wagga where rent was $210/wk to continue saving.
Rarely went to movies, out to dinner etc.
Still don't, really..
Wouldn't be where we are today without the sacrifices.. would probably be complaining like the rest of them, whilst I'm out at dinner waiting for the $250 bill.