Calculate the costs to see if you can afford to start building your property portfolio.
So you've bought your first home and have been chipping away at the mortgage for a little while, and now your home has risen in value. You're feeling a bit more comfortable financially, and you're starting to wonder if you can afford an investment property.
Finding the answer to this question raises a number of interesting points that will help you decide if this approach is suitable for you.
From a financial strategy perspective
Deciding whether you can afford an investment property will, for many people, be a matter of first sorting out your priorities.
Questions you must ask
- Why do I want to buy an investment property?
- How will this fit into my long-term financial strategy?
- What type of investment property do I want: one that brings high rental yields or one that I can sell it at a profit in five or ten years?
- Do I want to renovate to add value or do I want a property that I can bring tenants to immediately?
- Do I want to buy a house or an apartment?
- What will be the interest rate on my investment home loan?
All of these questions will help you formulate your strategy and lead you closer to the answer of whether you can afford the type of investment property that fits into your long-term plan.
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From a practical perspective
Here's a list of the expenses you need to be aware of if you decide to become a property investor:
- You are going to have to meet all the ordinary expenses of buying a property, such as stamp duty, bank fees and maybe mortgage lenders' insurance depending on the size of your deposit.
- You should research the area where you're thinking of buying and find out what type of rental yield is realistic for the properties you are looking at and what type of tenants the area or quality of house will attract.
- Remember there are other expenses to owning an investment property, including maintenance (the expected and the unexpected), insurance, council rates and water utility payments (landlords don't always have to pay for water, it's only compulsory in apartments where there's no unique meter system) and body corporate if it applies.
- Work out what you will need to pay each week or month once you subtract the rental yield from your mortgage repayments and an apportionment of the related expenses (that is, TOTAL EXPENSES per month minus RENTAL INCOME for a month).
- Ask yourself, does this weekly or monthly figure feel manageable? This is likely to vary depending on your personal risk profile.
- Finally, ask yourself if you will feel comfortable if you can't find a tenant for one month, three months or six months? You can sometimes get landlord's insurance to cover unexpected vacancies, so this could be an option for your peace of mind.
From the bank's perspective
Once you've decided that an investment strategy is a great idea to advance your long-term financial plan and you feel you can afford your mortgage and expenses without it negatively affecting your lifestyle, you then have to figure out whether the bank thinks you can afford an investment property.
The best way to answer this question is to ask the bank. If one bank turns you down, don't forget to try another. You can also take a look at credit unions and smaller banks to get your loan.
Calculating your serviceability
Often the banks will use the word serviceability when talking about loan amounts. Use the calculator below to see how much you could potentially borrow.