Can I afford an investment property?
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.
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:
- Deposit. If you want to avoid the cost of lenders mortgage insurance (LMI), you’ll usually need a deposit of 20% of the property’s value. Shop around and compare loans, as you may be able to find a mortgage with a loan-to-value ratio (LVR) of as high as 95%, meaning you'll need a smaller deposit.
- Home loan. In addition to repaying the principal amount you borrow, there are other costs associated with your loan. There are establishment and application costs to consider, as well as legal fees, valuation fees and monthly or annual fees. LMI can also be a costly expense if you have a deposit of less than 20%, and then there are the ongoing interest repayments on the amount you borrow. A range of other fees and charges may apply, so read the fine print before you sign up for a home loan.
- Purchase costs. There are other costs associated with the purchase that you’ll need to consider, such as stamp duty, the amount of which varies from state to state and is based on the price of the property. You’ll also need to consider the cost of the legal transfer of ownership ($650-$850), registration fees and the cost of a solicitor or conveyancer. Building and pest inspections will also need to be conducted before the sale of the property goes through, which could add $500-$1,000 to your expenses. Title searches are another added cost.
- Buyer’s agent fees. An increasing number of investors are using buyer’s agents to help them find and purchase the right property. If you choose to go down this route, you’ll need to factor your agent’s fees into calculations. As a general rule, buyer’s agents either charge a fee that is 1-2% of the property purchase price or a flat fee of between approximately $5,000 and $15,000.
- Insurance. Building insurance can protect your investment property against fire, storms, theft and a wide range of other risks, while Landlord Insurance provides cover if tenants damage your property or default on their rent. The cost of this type of cover is influenced by a range of factors, including the size of your property, the material used in its construction and where the property is located.
- Property management fees. You can manage your investment property yourself if you have the time and knowledge, but most people choose to employ a professional property manager to look after their investment home. Property managers perform duties such as sourcing and screening tenants, holding open houses, and organising any repair or maintenance tasks that need to be completed. As a general guide, expect to pay around 7-10% of your rent in property management fees.
- Repairs and maintenance. Over time, your property may need repairs. Taps will leak, fittings and fixtures will need to be replaced, and some features of the house or apartment will simply break down due to general wear and tear. You should be prepared to meet the cost of any repairs and maintenance that need to be carried out at the property. Plumbers, electricians, builders, and a range of other trades may need to be called upon to keep your property in tip-top shape. Repair and maintenance expenses are generally lower on newer properties as they are less likely to have parts break down.
- Strata fees. If you buy a townhouse or unit, you’ll have to pay ongoing body corporate fees. These fees cover the cost of building insurance and expenses associated with maintaining common areas, and they vary depending on the size and type of the building, where it’s located and its features. Don’t forget to examine the strata fees you’ll need to pay before you make the decision to buy a property.
- Council rates. Check with the local council to find out the average quarterly rates in the area for a property of the same size as yours. Factor this amount into your budget to help you calculate the potential return on your investment.
- Other costs. Depending on your individual circumstances, other costs you may need to consider include:
- Accountant’s fees to help you calculate rental income and expenses when filing your tax return
- Pest control expenses
- Costs incurred when a tenant moves out and you need to find a new one
- Renovation costs if your property is due for an upgrade to increase its ‘liveability’ and make it more attractive to prospective tenants
- Travel and accommodation expenses if you need to travel to inspect your property or oversee maintenance
- Land tax payable to the government on your investment property
- The cost of connecting all the utilities and services to your property for tenants
- Agents’ fees, legal fees, advertising costs and other expenses to ensure the property is in top condition
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.
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.
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