If you're just starting out as a young investor or haven't got any equity or a deposit of your own, then this is for you...

Most of us understand the importance of planning for the future. When it comes to our finances it’s no different. It may seem premature to start spending a lot of time thinking about your financial future whilst you’re young. The truth is however, that if you take some simple steps now, you can plan to have an enjoyable and financially secure lifestyle - now AND in the future.

Getting Started

There are many ways in which you can plan for a better financial future. It can sometimes be confusing deciding which way to go.  Investment in the property market has proven to be a fantastic long term strategy. Yet while most people realise the value of property as an investment, the question remains...

In an environment of rising house prices, how can I get my hands on one, let alone start a wealth creating property portfolio?
With the significant price rises we have seen in the property market over several years, it has become harder and harder for young people to purchase property. An analogy of a moving train can be used to describe the constant game of catch up that is played by thousands of people across the country. As soon as a deposit is hard saved, a deposit of twice as much seems to be required. The train keeps speeding on and it can be a constant struggle to catch up to it, let alone jump  aboard!

While there is more than one way to create wealth, while you’re young it’s important to make decisions that make the most of the resources available to you and enable you to take advantage of your most precious asset...time.

Nest or Invest?

When it comes to property, is it better to buy your own home first or to rent and buy an investment property? Most people feel that the best decision they can make is to buy their own home. They’re right! At least partially right... It’s the great Australia dream isn’t it? To own your home, have a backyard and of course be able to play cricket on your quarter acre block. Having your own home is great. It puts you in the property market, you are in a position to accrue equity through the growth of your property, and of course you have the emotional satisfaction of having your own domain.
When financially weighing up the option to buy your own home or invest first, it really comes down to a matter of cash flow. Unfortunately, in Australia, any expenses incurred in holding your home are not tax deductible. Compare this with an investment property, where everything from rates, insurance, maintenance, management and even interest on your loan is tax deductible. This can make a big difference to your cash flow position.
Aside from cash flow costs, there is another benefit of investing first then buying your home.

As we’ve talked about, an investment property provides you with tax deductions and rental income, or in other words extra cash flow. Assume you acquire an investment property first, then go on to buy your home. You could funnel the extra cash flow from your investment into helping you pay off your non-tax deductible home loan faster.

The decision to buy a home first, or an investment first, will always differ from person to person. It’s a personal decision and everyone’s circumstances are different.
With extra equity from an investment property, you may also have the opportunity to live where you want to, not where you have to because of affordability.

Getting the Equity

Ok. So how can we actually enter the market and start making money through property?
Here’s a little secret. Chances are, if Mum and Dad have had their house for a number of years, they could well have thousands of dollars sitting unused right underneath the floor boards! Don’t tell them! At least not yet. As the value of your house increases and the debt level decreases, you begin to accumulate equity. With the correct financial structure in place, this equity can be accessed like money from an ATM.
Don’t be fooled though! If you start spending equity to buy things like a new plasma TV or a roaring V8 ute or even a cruise through the South Pacific you’ll end up in trouble!
What is exciting though is that this equity can be used to help you purchase appreciating assets that will grow and make you money into the future. Compare this to spending it on a TV or car, both of which only depreciate and lose their value.

This whole idea of using equity can seem scary - especially if you break it straight away to the folks. Rest assured that all of their concerns can be properly addressed. Here’s the point. With some help from Mum and Dad, you could begin a property portfolio at no cost or risk to your parents’ home or their cash flow.

Any good wealth creation strategy needs a plan. You can’t expect to go from A to B in one foul swoop. But with Mum and Dad’s help and proven steps, you can achieve your goals and your parents will have the satisfaction of knowing they were able to help you enter the property market - a feat that is getting harder and harder to pull off.

Stage 1

The first stage is to ensure that the right financial structure is in place for your parents. This is a crucial step and getting it right will ensure the success of your plans and the security of your parents’ asset. Their home must be structured so as to allow the borrowing of equity.
Time to go out and get that investment property. A complete cash flow analysis should be completed, clearly identifying costs. This would include how the interest portion on Mum and Dad’s equity would be paid. A clearly defined exit strategy should also be agreed to in the event that you are unable to hold the property.

Stage 2

In 3-4 years, depending on growth of course, you can revalue your investment property and release any accrued equity. This is payday for Mum and Dad, and is perhaps the last time you’ll see them as they set sail on an extended overseas holiday!
As your property continues to grow, you will accrue more and more equity, but your costs and debt will remain the same (apart from some likely changes in interest rates). As rent increases, it will also take less and less cash flow to hold onto your growing property. This goes back to our concept of holding as much appreciating asset for the least amount of cash flow. Before long, you’ll be ready to leverage yourself into another property and repeat the process all over again. Except this time it will be on your own two feet!

As you can appreciate, there is a lot of planning and analysis that needs to go into this type of strategy. Much more than can be outlined on two pages. You will need to consider your own individual circumstances and that of your parents. While there are certainly risks, people across the country are using this exact strategy to gain access to the property market.

The Risks

So what can go wrong? Probably the biggest of these is the loss of one’s job. If you lose your job, your cash flow is severely compromised. The other concern is that banks will cross-collaterise the entire loan. For example, the bank may say that the best way to structure the loan is to place both your investment property and your parents’ property under the same roof. This is incredibly dangerous and should be avoided at all costs. The danger here is that if you as the borrower defaults, the bank will be able to sell a property in order to recover the debt. Your investment property is heavily in debt while on the other hand, your parents’ home not. The result is  the bank sell the parents’ property, in order to recover outstanding debts. Not good! With the right finance structure you can protect against this scenario. Of course remember that this strategy can be used with anyone in the position to loan you some equity.

Unless you have a significant amount of cash stashed under the mattress or get lucky with a large inheritance, this strategy can be a viable and attractive way to get started. For more information, or to receive an EquityStart information pack, call 07 3489 2555 or visit wag-online.com