Can I afford to buy an investment property?

This is a question we often get asked and it is important to recognise you do not necessary have to be a high income earner to purchase an investment property or start an investment portfolio. However, if your income is high, then there could well be some tax advantages of owning an investment property and these should be explored with a qualified accountant.

To start you need to understand what you can afford. Sounds simple right? Consider your current cash flow situation and budget and how much could you afford to put towards repayments and costs of an investment loan if required.

Of course once you have an investment property, you will have rental income which supports your existing income and assists with managing the investment loan repayments, however there are also costs associated with owning property. 

To establish if you can afford to purchase an investment here are the key areas to be addressed:

  • Your annual income less you existing expenses 
  • The proposed new rental income
  • Your savings or available equity in existing home for the deposit

Then with regard to the purchase and loan we look at

  • Purchase Costs of the new investment property
  • Any grants or concessions available
  • Ongoing holding costs of owning the property (ie will it be positive, negative or neutrally geared. Which just means how much will it costs you to own it on a weekly, fortnightly or monthly basis)
  • Total cost and breakdown of purchase figures
  • The best suited loan structure and the current interest rate
  • Repayment type  
  • Loan term  
  • Estimated weekly, fortnightly or repayment amount.
  • And have a really good accountant provide taxation advice 

Ok, so we have prepared figures and details and can afford it, so what do you look for in an investment property.

Here are some starters to consider! 

Research Location - look for population growth, economic growth (ie major shopping centres government projects and spending, transport and services and overall rental demand

  • Buy at the right price
  • Set the loan structure correctly at the outset
  • Allow property to grow in value over time
  • Use equity growth as deposit on your next property

What is equity?

Lets look at a scenario of using equity from an existing property as deposit = No money down

Brian bought a property 3 years ago for $350,000 with a loan of $245,000 (70% loan)

Over the past 3 years he has paid $20,000 off the home loan balance, leaving $225,000 owing

Houses typically increase in value over time, and over the past 12 months Adelaide has had 2.7% growth in 2015 (source: ABS 2015)

For convenience, lets assume the growth was the same for the past 3 years, this means Brians house is now valued at $379,000

This gives Brian $154,000 in equity (= House value less current loan balance)

Here is how is looks

 

Do I have enough equity?

Here is a simplified approach of how we work out what amount of equity is required. Based on $154,000 available in Brian's property 

                                                    Value                             Loan

Existing Property                       $379,000                      $225,000

New Property                             $350,000                      $368,000 (includes purchase costs) 

Total                                            $729,000                      $593,000

Loans = $613,000

Property Values = $729,000

LVR of 81%

Note: Loans above 80% are subject to a lenders mortgage insurance premium, which in most cases can be added onto the loan amount. In some instances there are lenders who offer loans up to 85% without mortgage insurance.                    

 

Using equity is one way of purchasing an investment property, however there are many other options available. Remember, once you understand the figures and how much it will potentially cost you, you then establish how you will pay the deposit and purchase costs to complete the purchase

As always, we encourage you to obtain professional credit advice to ascertain what is available to suit your personal circumstances