How to buy an investment property with no money down in Australia

That’s because saving a deposit for an investment property in today’s market is proving to be the biggest barrier for most Aussies looking to get into the property market with a real estate investment. 

With that said, it’s no wonder there is an increasing number of people looking for an investment property loan with no or little deposit in order to enter the property ladder. 

But just because you’re not flush with money, doesn’t mean you can’t invest in property. 

So, can you buy an investment property with no money down in Australia? The answer is yes. Believe it or not, you can actually invest in property with little to no money if you’re sensible and have done your due diligence by researching all your possible options. 

Having little money should not deter you from investing in property. However, you will need to be smart about it and consider a few key ideas throughout the process.

Before we get to the different options available, we should underline that some options can only be viable for specific cases and will not apply to everyone. However, some of these options (which may be close to your current circumstances) may provide a guide for your investment strategy. 

With that said, let’s take a closer look at how you can buy an investment property with no or little down payment. 

How can I buy an investment property without a deposit? 

There are several ways to buy an investment property without a large upfront deposit in Australia, but the process can be much more complicated than the usual mortgage loan and investors may need to exert more effort in order to get the best deal. 

Here are the different ways to do it:  

• Use existing equity in your property 

If you have existing equity in your current home or in another investment property, you can borrow against that and use those funds to finance a new deposit — allowing you to buy a new property. 

This is the perfect option for Aussies who are already property or home owners but are looking to branch out and build their portfolio. If you have enough equity in your current property, then it won’t be necessary for you to save up for a down payment.  

Another method to use is cash-out refinance. If you have about 20 per cent equity in the existing property, you can take out a new mortgage for more than what you owe. Then, you can use the extra money to either buy another property outright or as a down payment on a property.

As a bonus, your equity will also grow faster with more properties, which equates to more capital growth. Think of it as a snowball effect — the more equity you can access, the easier it is to expand your property portfolio. 

However, it’s important to note that this common strategy – used by even those with large-scale portfolios – also creates a higher level of risk. 

While property investors grow their portfolios using existing equity so they don’t have to break into their savings, they are also at higher risk of default or failure to make loan repayments.    

• Get a guarantor loan

But what if you don’t have an existing property that has equity you can use? How can you invest without coughing up a big deposit? 

For people in this situation, a viable option is to get a guarantor loan from lenders. Recently, banks have started offering 100 per cent guarantor loans if a close acquaintance or a family member is willing to guarantee a percentage of the debt.

So how does it work? First off, you will need a guarantor (usually a family member) who has their own property. Their real estate will serve as collateral for your lender. Because the bank has additional security, they are willing to lend the full amount required. 

Under this option, you (the borrower) will make your repayments like any other home loan, but the guarantor is held responsible if you fail to make your payments. 

Nowadays, most banks and lending institutions will allow the guarantor to cover a certain percentage of the loan. 

Ideally, the 80 per cent LVR (loan to valuation ratio) sits with you, while the remaining 20 per cent is secured in cash or through the guarantor loan. 

This means that in some cases approved by the bank, you can use a guarantor to cover the percentage that you don’t have.

Depending on the terms and conditions, you can also remove the guarantor once you have secured enough funds or equity to cover the debt. This way, your guarantor will only be involved in the mortgage proceedings for a shorter period of time.  

• Seller finance

Moving on to the more non-traditional ways to buy an investment property without a down payment, we look into seller finance. 

Seller financing refers to an agreement in which the seller handles the mortgage process instead of a financial institution. In more simple terms, this involves you taking a loan from the owner of the property rather than a bank.

By taking it directly with the owner, you don’t need to save a deposit. You just need to reach a deal with the owner that you will pay the full price of the property with an interest on an ongoing basis. This removes the need to have the funds upfront for a deposit. 

Let’s look at an example where this option could work. Let’s say you’re currently renting a single-family house. After years of renting, you could inquire to your landlord if they’d be interested in selling you the property.

If you’ve been paying rent on time and you have kept up a good business relationship with the owner, you could potentially reach a private agreement with the landlord. After reaching a deal, a real estate attorney can write up a promissory note, used in place of a mortgage, which lists the terms of the deal. 

If you’re lucky, you may not need to pay a dime to secure the property. But in most cases, you will probably need to give the owner a down payment of around 5 per cent to 10 per cent of the purchase price just to get your landlord to sign on the dotted line.

Still, the down payment for these types of agreements is usually lower than what most financial institutions can offer. 

The seller will also probably expect a payoff of the property down the line (e.g. five years later), but the payments would be amortised, usually at 30 years. You would then get a mortgage to pay off the balance.

Sounds like a dream deal, right? But before you get too excited with this option, we have to hand down the disclaimers. First, while seller financing is legal in Australia, it is almost rare that property owners choose to go this route when selling their property. 

Additionally, keep in mind that sellers may charge high-interest rates, given there is no cap or authority governing the loan. While it’s risky, it offers a chance to buy a property without a deposit, or when the bank will not approve an investment loan. If you are able to find yourself where this is on the table, it could work in your favour.  

• Property options

We’re not leaving any stones unturned, as we also look into the process of property options. However, note that this process is harder to avail and more complicated than seller finance. 

The general notion of this option is that you approach the owner of a property with an amount that you are willing to pay for the option to purchase the property.

Under this scenario, you would have an agreement to purchase a property at a lower price if the property’s value rises. You also have the opportunity to get a full loan for the purchase price due to a higher property valuation. 

As we’ve mentioned, this is more complicated than a standard property buy and you will need to find a lender who has a full grasp of these agreements and will be willing to base the loan on the valuation and not the purchase price. 

But if you’re prepared to go the distance and take this option, make sure to talk to a licensed mortgage broker to fully understand what you’re getting yourself into. It’s also advisable to seek out non-traditional lenders who may be more open-minded about this option. 

• Partnership agreements

Lastly, consider forming a partnership with someone who has the deposit for the property and is willing to foot the initial bill in exchange for you doing the legwork. You can think of it as getting a financier.  

While this option may only provide you with a smaller ownership percentage of the property, it’s a start and a good way to become an owner without saving up for a deposit.  

Preferably, you can seek out a partnership with someone who is money-rich but time-poor that wants to invest in property.

Don’t discredit the amount of time and effort that goes into property purchases — there is a lot of research that goes into finding the right investment. 

If you have good negotiating skills, you can also convince them to pay the deposit in return for your work organising the purchase. 

Of course, you will need to consider the legal requirements involved in this. It’s advised to seek the help of a professional legal adviser, so it is outlined how profits and losses will be split.

Disclaimer: The information provided should be taken as general information and does not replace independent investment or financial advice, which we strongly recommend.   

Smart Property Investment provides Australian property investors with must-have insight, strategies and real-life experiences to help guide successful buying and selling decisions in the Australian property market.

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