How to save for a down payment for your first investment property

It’s no secret that investing in property costs a lot of money. Saving enough for the down payment of an investment property is one of the biggest barriers investors face when buying. In fact, there is a low percentage of investors who are able to pay cash for their first investment property. 

The good thing is there are many ways to finance real estate investments. The most common is by getting an investment property loan. 

If you are going to go for this financing option, you will need to start saving up for a down payment if you haven’t already.

So, we’ve put together a guide on how you can save a down payment for your first investment property.

What is a down payment for an investment property? 

If you’re not familiar with it yet, a down payment is a type of payment that is a partial sum of the total price that the buyer has agreed on. This type of payment is usually required for expensive purchases such as a car or a house. 

It is paid up-front and is usually paid in cash or equivalent at the time of finalising the transaction. 

When purchasing an investment property, the down payment is a portion of the total cash investment that the investor will have to pay from their own pocket. Having this amount is a key requirement for getting approved for an investment property loan. 

How much do you have to put down on your first investment property?

Before you get a mortgage for your investment property, you should make sure you have enough money for a down payment. Let’s kick things off by answering one important question: how much money should you be saving?

Sadly, there is no one-fits-all answer to this question. The down payment you need will be based on several factors, including the type of investment property (rental property, commercial property etc.), the purchase price, and the loan type. 

However, for most Australian mortgage lenders, the average down payment is 20 per cent of the property’s purchase price. For a more accurate estimation, you can find the average down payment in the area you’re looking into to know how much money you should save.

What is the minimum down payment for an investment property?

If 20 per cent seems daunting, there is still a chance for you to get into the real estate market. 

The deposit on an investment property can be as low as 10 per cent, sometimes even 5 per cent (depending on the lender and depending on your financial circumstances). However, paying less than 20 per cent would mean paying lenders mortgage insurance (LMI).

For example, if the investment property you are looking to buy is priced at $750,000 and you have a deposit saved up of at least 20 per cent ($150,000), you may be able to avoid paying LMI to pay for your home loan. (Please note that the figures used above were selected for calculation purposes only and may not reflect real/current valuations).

Remember that the higher your down payment on investment property is, the less your mortgage loan will cost in the long run. Therefore, you want to save as much as possible for your down payment.

But as the interest paid on an investment loan is normally tax-deductible, investors often have less incentive than home owners to pay up a large deposit.

To find out which mortgage is best for you and your situation, read our guide on how to choose the best investment property loan. 

What other costs are involved in buying your first investment property?

When purchasing an investment property, it’s important to understand that a down payment is not the only thing you need to save up for. You will also need to factor in the following costs of buying in your budget:

• Stamp duty: The stamp duty on an investment property can be as high as 6 per cent of the property value. This rate varies for each state or territory, so make sure you check before completing your purchase.

           Check out Smart Property Investment’s Stamp Duty Calculator to have a better estimate of the stamp duty you will be required to pay. 

• Valuation fee: To make sure you’re not overpaying for your property, it’s a good idea to get a professional valuation. A property valuation is an assessment of your property’s value based on the location, condition, and multiple other factors. This can cost hundreds of dollars, depending on the provider. Remember that you will also need to get building and pest inspection done, which can rack up several hundreds of dollars as well. If you are buying a unit, you also need to get a strata report.
• Loan fees: If you apply for finance, you may have to pay an application or settlement fee.  
• Legal fees and conveyancing costs: These costs are payable when you invest in property. However, in some cases, these fees can be waived.   
• Transfer fee: To register your name on the property title, you will need to pay a government fee. This will remove the vendor’s name and official transfer ownership of the property.
• Lenders Mortgage Insurance (LMI): LMI can amount to thousands of dollars and is payable when you’re borrowing over 80 per cent of the value of the investment property.

You’ll also have to pay ongoing costs, including council rates, repair and maintenance costs, insurance and agent fees, property manager fees, and home loan repayments.

To get an estimate of all these costs, you can check out Smart Property Investment’s mortgage calculators before buying your first investment property. Our range of calculators can help you best plan critical parts of owning a property like borrowing, taxes, and loan repayments.

How can I prepare myself financially before buying an investment property?

There’s no question – buying a property is a big financial undertaking. But it’s important to understand that finance is king when it comes to investing in property.

Here are our practical financial tips to help you save money for your first investment property: 

• Speak with a mortgage broker. Consulting a professional is a good way to get a clear idea about how much you can borrow or whether you’re financially ready. 
• Consult your financial advisor. Having a clear understanding of your financial capabilities and responsibilities will help you build a strong foundation. Take the time to speak to a property-focused accountant or financial advisor before you start saving.
• Get pre-approved. Oftentimes, investors often miss out on a great opportunity because of the delay in finance. If possible, get pre-approved before you even start hunting for an investment property. By securing a pre-approval, you can gauge your borrowing capacity and secure an investment property loan more easily.
• Unlock the equity in your home. If you’re a home owner, it may not be necessary to provide a cash deposit at all. The equity built up in your home can often be used instead of a cash deposit, allowing cash savings to be used for other purposes, like a few renovations on the investment property. Generally, the maximum home equity you have available to use as a deposit is typically calculated as 80 per cent of your home’s value, less the balance of your home loan.
• Know your cash flow. Cash flow is important when you’re investing in property. Add up your income, compare it to the regular costs of owning your investment property, and give yourself some wiggle room for unexpected expenses such as repairs. Your lender will evaluate if your cash flow can comfortably handle owning a rental property or investment property, so it pays to do this review yourself before applying for a loan. 
• Pay off your debt and set a savings goal. Your debt (especially those with high interest rates) can limit how much you can save for a down payment. Create a strategic plan to pay off your financial obligations. Afterwards, you can focus on saving money for your down payment. It’s recommended to set up a separate bank account for your down payment fund.
• Save unexpected/extra money. Most people tend to spend unexpected influxes of money (tax refunds, bonuses, inheritance etc) on luxuries and other unimportant things. Be smart and put any extra money you receive unexpectedly directly into your down payment savings account.  
• Boost your income. Find other streams of income aside from your full-time job. Other ways to maximise your income include taking on a side job, renting out a room in a property you own, selling items you don’t need etc.