Investing on a low income

If you do your homework and have a creative approach, investing on a low income can be a great vehicle for long-term wealth creation.

Property choice is critical
The best types of property for investors on low incomes are those at the lower end of the scale in price but with high rental returns.

This may mean looking to the outlying suburbs of the major capital cities and to regional areas, such as mining towns.

Steer clear of negative gearing
A low-income investor probably isn’t going to be in a position to be able to fund any shortfall, so negatively geared property isn’t going to be a good option – ideally it will need to be neutrally or positively geared.

Do your homework
As with all aspects of property investing, it’s critical to do your homework on the best way to finance your planned property purchase and get the best deal possible.

First-time investors should keep the following in mind:

• Consider the scope for depreciation, which could total thousands of dollars a year and make the difference between the property being negatively or neutrally geared.
• Applying to the ATO for a tax adjustment at the beginning of each financial year might make funding the property more manageable. For example, if your initial calculations indicate that you would receive a tax refund of about $3000 on your investment property at the end of the year, a tax adjustment will mean that your employer will take $60 a week less tax out of your pay, which could make the difference between being able to afford the property or not.
• Consider looking at Terry Ryder’s Cheapies with Prospects report or reports by Residex on where to find affordable and budget properties in Australia and those areas that provide the best rental returns.
• Repayments on your investment property loan should be interest only (as they are about 25% less than principal and interest repayments), minimising the amount required for loan repayments and maximising the chance of the property being neutrally or positively geared.

Think ‘outside the square’ and get advice
Plenty of people with a minimal income have gone down the property investment path by thinking ‘outside the square’ to make it happen.

See if you have family and friends who might like to invest with you, or maybe your parents are prepared to act as guarantor to get you started.

The first couple of years of owning a property can be the toughest, particularly if there is any shortfall in your income and expenses.  However, it should then start to get easier as rents regularly increase and any gap starts to decrease, to the point where the property then should be at least neutrally geared.

Once you can get the property to that stage, you then have the opportunity to consider buying your next investment property and accelerating your wealth creation.

Speak with your mortgage broker about your options.