There is no argument about it!
Purchasing your first investment property is like trying to climb Mount Everest.
The great difficulty for young people is how to get that first foot-holding in the property market particularly when you have little equity and low income.
The hard reality is that you will most likely not be able to purchase an investment property without a substantial deposit and high income. It will be difficult to achieve that first investment on your own!
So rather than walk away and forget about property investment why not consider going into partnership with another would-be property investor.
The Partnership
A more practical strategy is to pool your resources with another investor in a partnership to purchase that first investment property.
Let's look at a real-world scenario.
The strategy I adopted with my first real estate purchase was to partner with my brother and pool our resources. I could have purchased my first home by myself but I would have borrowed to the limit of my capacity and put myself under possible financial stress.
We decided to purchase a vacant home site in a new land subdivision but we decided not to build a home right away. As we had combined our resources, we had a relatively large deposit and could easily afford to pay back the mortgage at an accelerated rate.
We had made the first small step into the property market. And I was happy because I knew purchasing land is the most difficult step in building a new home.
After two more years of hard saving we finally signed a contract with a builder for a home to be built on the land. We lived in the home together and paid back the mortgage as quickly as possible. We actually ended up living in that home for 8 years and then sold it to withdraw our equity and go our own ways.
Having experienced pooling resources with another person, I believe it is a much better strategy for the short and medium term than to borrow funds right to the limits of your capacity. When you borrow to the limits of your capacity you have little room for anything to go wrong before you become a victim of mortgage stress or even a mortgagee sale.
Now before you say that a partnership is not for you let me remind you about some of the great partnerships of our time! Microsoft started in a garage as a partnership between Bill Gates and Paul Allen. Apple Computers started in a garage as a partnership between Steve Jobs and Steve Wozniak. There are many famous families, brothers, sisters, father and son partnerships that have all been hugely successful. They didn’t do it solo but combined their resources.
Practical Example
Two investors decide to pool their resources, in a partnership, and purchase an investment property. Now there is a larger deposit and two incomes to support the mortgage application.
This strategy can work well if you have another family member or friend with similar wealth creation goals. However, I highly recommend you put together a formal partnership investment plan (in writing) detailing how everything will work including what happens when one (or both) partners decide they want out of the investment. Usually the plan will give the other party first option to buy out the partner who wants to sell. Otherwise both partners will need to agree on selling the property and recovering their separate investments.
Now if you have three partners then purchasing an investment property can become even easier. If I had a third brother, we could have built the home immediately and saved on rental costs. Later we could have afforded to buy an additional property for rental investment using the equity built up in the first home.
Partnership Agreement
A partnership agreement should contain the following items:
The legal title of the property and whether you are joint tenants or tenants in common.
Who has authorization to spend money, what the money can be spent on and the limit of money that can be spent? This is most useful when a repair is required to actioned and the other partner is not available.
How is the surplus of funds (income less expenditure) distributed to partners?
How to control the maintenance of the property?
How to dissolve the partnership and sell the property?
What happens when one or more partners suffer financial difficulty?
What happens on the death of a partner?
Investment Plan
When you are serious about building wealth you need to investment in multiple properties.
Once you have purchased the first property and it's generating income then you can plan for the second property. The plan is to purchase an additional property every few years by increasing rents and reducing debt. This enables refinancing of the existing properties to afford to purchase an additional property. Over many years you will build up a portfolio of properties that you make you wealthy in the long term.
Conclusion
Purchasing your first investment is very difficult. Most people struggle to save the deposit and earn enough money to afford the shortfall between the mortgage payments and rental income.
However, property investment is a key strategy to generating long-term wealth.
So rather than walk away and forget about property investment why not consider going into partnership with another would-be property investor. The best co-investor would be a family member but a close friend may also work out well.
Purchasing an investment property is now attainable as there is a larger deposit and two incomes to support the mortgage application.
However, it is critical that you put together a formal partnership investment plan (in writing) detailing how everything will work including what happens when one (or both) partners decide they want out of the investment. This will save a lot of possible future arguments and help you reach your investment goals sooner.
