If you've finally built up some equity and are not sure whether you can afford an investment property, read on to calculate your costs.
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.
What causes property prices to move up and down?
From a financial strategy perspective
The answer to whether you can afford something, whether it's a holiday, a car, a piece of designer furniture or a share portfolio, will very often come down to your priorities. While you could afford that overseas European vacation if you live on nothing but muesli and rice for the next six months, is that a sacrifice you're willing to make?
Deciding whether you can afford an investment property will, for many people, be a matter of first sorting out your priorities. You might have made a gain on the home you live in and you're pretty confident you can meet the mortgage repayments once you have a tenant renting your place, but if having a longer term financial strategy is not on your radar, then I'm sure you can find a lot of other ways you might prefer to spend your time and money.
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
It's always good to be practical. The more detailed information you have for any purchase, the better. So 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.
Before you start
It is important to have a clear idea of your investment strategy before you start. Make sure you have done the following:
- Work out your investment goals
- Have a clear budget
- Calculate your expected investment costs
- Calculate your expected rental gains
Once you have a clear vision of where you want your investment strategy to go, knowing if you can afford it will become clear.