Omari Gates
Investing in property is a popular way to build wealth in Australia. However, the high upfront costs of stamp duty, transfer fees, mortgage registration fees, and deposits can be daunting, especially for first-time investors. While a higher income does make it easier to secure an investment property, it is still possible to invest in property with little money in Australia. This can be achieved through various strategies, such as partnering with someone who has the financial resources, utilising existing equity in a current home, or taking advantage of government-backed programs. Additionally, alternative investment options like Real Estate Investment Trusts (REITs) and pooled mortgage funds offer ways to invest in property without purchasing physical real estate.
| Characteristics | Values |
|---|---|
| Real Estate Investment Trust (REIT) | Minimum amount to get started is around $500 |
| First Home Super Saver Scheme (FHSS) | Allows first home buyers to make voluntary contributions (before or after tax) into their superannuation which they can access later for their home deposit |
| Convert your Principle Place of Residence (PPOR) into an investment property | Generate a steady flow of rental income and access depreciation and tax benefits |
| Owner-occupier | Buy as an owner-occupier and live in the property for six months to a year before turning it into a rental; first-home buyers may still be eligible for a grant |
| Rentvest | Rent a property to live in while owning an investment property that suits your budget; use the income generated by your investment property to repay some or all of your mortgage costs or to support your rental costs |
| Pooled mortgage funds | Invest in the Australian property market without the hassle and ongoing costs; pay interest as regular distributions (between 5 and 10% per annum); invest for a period of time that suits you |
| Crowdfunding | Low entry point at $1000; build a broad property portfolio with very little investment |
| Partner with someone who has cash | Buy a property that you might not have been able to afford by yourself |
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What You'll Learn
Real Estate Investment Trusts (REITs)
A-REITs are typically managed investments in large-scale commercial property assets that may be out of reach for individual investors, such as office towers, shopping malls, industrial buildings, hotels and cinemas. They are overseen by a professional manager, who selects the investment properties and manages tenants, improvements, maintenance and rental.
The benefits of investing in A-REITs include diversification, a regular income, and capital growth. They can generate two kinds of return: capital growth and income, in the form of regular distributions. A-REITs may offer the potential for a consistent income stream, as they typically earn regular rental income from medium or long-term tenants.
There are some risks associated with A-REITs, and it is important to seek independent advice from a professional adviser before investing. Higher debt levels, for example, can magnify returns but also increase risk, especially if property values decline or interest rates rise. It is also important to understand the tax implications of investing in A-REITs, as they can be treated differently for tax purposes and may have consequences such as capital gains tax or tax on dividends.
In Australia, the minimum amount to get started with A-REITs is around $500, and they provide investors with an opportunity to diversify their investments beyond residential properties.
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First Home Super Saver Scheme (FHSS)
The First Home Super Saver Scheme (FHSS) is an Australian government initiative that allows first-time home buyers to save for their first home deposit using their superannuation fund. Here's a detailed guide on how the FHSS works and how you can utilise it to invest in property with little money:
Making Voluntary Contributions
Under the FHSS, you can make voluntary contributions to your superannuation fund, which can be done through personal contributions or salary sacrifice. These contributions can be made before-tax or after-tax, with different tax implications for each. Before-tax contributions, also known as concessional contributions, are taxed at 15% within your super fund. On the other hand, after-tax contributions are not taxed in your super fund. It's important to note that you can't access employer contributions through the FHSS.
Contribution Limits
There are limits to how much you can contribute annually and in total. You can add up to $15,000 per financial year to your super account under the FHSS. The maximum total amount you can save for your first home deposit is $50,000. It's important to stay within these limits to remain eligible for the scheme.
Withdrawing Your Savings
When you are ready to purchase your first home, you can apply to the Australian Taxation Office (ATO) for a determination, which will tell you the maximum amount you can access. You will need a myGov account linked to the ATO to make this request. Once you receive the determination, you can apply to have your super released. Keep in mind that there are timeframes to adhere to when making your release request to avoid being subject to FHSS tax.
Eligibility and Conditions
The FHSS has eligibility criteria and conditions that you must meet. For example, you must intend to live in the premises you are buying as soon as practicable for at least six months of the first year you own it. Additionally, you should understand the conditions of release and ensure your super fund will release FHSS amounts. It's recommended to check the ATO website for detailed information on eligibility and conditions.
Tax Implications
Using the FHSS may have tax implications. Assessable FHSS amounts will affect your tax, and you will need to include both the assessable and tax-withheld amounts in your tax return for the year you make the request to release. It's important to consider these tax implications when planning your property investment through the FHSS.
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Convert your Principle Place of Residence (PPOR)
Converting your Principle Place of Residence (PPOR) into an investment property is a common way to invest in property with little money. This strategy can generate a steady flow of rental income and provide access to depreciation and tax benefits, resulting in additional cash flow.
In Australia, a PPOR refers to the property where someone resides or lives as their home. It is typically exempt from capital gains tax (CGT) when sold, provided it has been used solely as a residence. This tax exemption is a key aspect of Australian property law, offering financial benefits to homeowners when selling their primary residence.
To prove that a property is your PPOR, you must demonstrate continuous occupancy and document life events that influenced your PPOR status. Examples of life events include marriage, the birth of children, or changes in employment, which may result in a move to a new property. Even if you temporarily vacate your PPOR, you can still claim it as your main residence for tax purposes as long as you do not establish another property as your PPOR during this period.
Before converting your PPOR into an investment property, it is essential to consider the tax and financial implications. For example, if your property has recently increased in value, it may not have much short-term growth potential as an investment option. Additionally, your PPOR may not have rental appeal, especially if it does not meet the demands of the local market in terms of size or amenities.
There are alternative ways to invest in property with little money in Australia. One option is to utilise a Real Estate Investment Trust (REIT), which allows you to invest in property using stocks with a minimum investment of around $500. Another option is to explore pooled mortgage funds, where investors pool their funds and loan them to borrowers as registered mortgages, secured by physical property.
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Rentvesting
Here's how it works: you rent a property to live in, which gives you the freedom to choose a location that may be too expensive to buy in. Simultaneously, you purchase an investment property within your budget, which may be in an area with lower asking rents. This strategy enables you to take advantage of property appreciation and generate rental income, contributing to your wealth creation.
For example, consider the scenario where you want to live in a suburb close to the city, but the property prices are beyond your reach. With rentvesting, you can rent a property in your desired suburb and benefit from the convenient location while investing in a more affordable suburb.
It is important to note that rentvesting involves higher upfront costs compared to other investment types, as you need to manage both rental payments and mortgage repayments. Additionally, there are risks associated with finding renters and potential issues with property maintenance. However, if the rental income does not cover the costs of owning the property, it is considered negatively geared, which can provide attractive tax benefits for investors.
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Pooled mortgage funds
Some pooled mortgage funds, like the Arthurmac Private Debt Fund, offer investors greater control over their investments. Instead of a fund manager deciding which mortgages to invest in, investors are presented with opportunities and allowed to select which mortgage investments to fund based on their risk tolerance, property preference, maturity date, and desired monthly returns.
The Australian Secure Capital Fund (ASCF) is another example of a pooled mortgage fund. It offers three unique funds, each with its own balance of risk and return. The Premium Capital Fund provides added capital protection measures, while the Select Income Fund takes a conservative approach to loan security by investing in first mortgages only. The High Yield Fund offers the highest targeted distribution rate by including second mortgage loans in the pool.
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Frequently asked questions
Here are some common ways to get started:
- Convert your Principle Place of Residence (PPOR) into an investment property to generate rental income and access tax benefits.
- Buy as an owner-occupier and live in the property for 6 months to a year before turning it into a rental.
- Rentvesting: Rent a property to live in while owning an investment property that suits your budget.
- Utilise the First Home Super Saver Scheme (FHSS) to make voluntary contributions to your superannuation, which can later be used for a home deposit.
While it is rare, it is possible to get a 100% loan with no money deposited. Government-backed programs (FHLDS) also allow you to borrow up to 95% of the property's value, with the government covering the deposit shortfall.
You can seek a partnership with someone who has the financial resources but lacks the time to invest in property. You can also look into borrowing against the equity in your existing home or investment property to finance a new deposit.
There are a few options to consider:
- Real Estate Investment Trusts (REITs): Pool investor money to invest in properties, typically commercial properties. The minimum investment is around $500, and investors earn income from rent and capital growth.
- Pooled Mortgage Funds: Managed by a fund manager, investor funds are pooled and loaned out to borrowers as mortgages, secured by physical property. Investors are paid interest at a rate of 5-10% per annum. The minimum investment is $10,000.
- Property Crowdfunding: Investors pool their money together to invest in property ventures and receive a portion of the profits. The entry point is typically around $1000.
