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.
Okay – so you’ve bought your first home, been chipping away to pay it off for a little while now and your home has risen a bit in value since the hammer came down on your sale a few years ago. You’re feeling a bit more comfortable financially than you have since you first signed up for your mortgage. So the next question is quite natural: Can I afford an investment property?
While ‘can I afford it?’ might seem like an obvious question to ask while you’re going through the deliberations of whether an investment property might be the smartest next move in your investment strategy, coming to answer this question raises a suite of interesting points that will help you decide the suitability of this approach.
Now it’s time to try on a few hats to see what the answer might be.
From a financial strategy perspective
The answer to whether or not 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. Sure – you could afford that overseas European vacation if you live on nothing but muesli and rice for the next six months – but 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. Sure 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 whole lot of other ways you might prefer to spend your time and money.
Questions you must ask
So before you do anything sit down and work out:
Why do I want to buy an investment property?
How will this fit into my longer-term financial strategy?
What type of investment property do I want:
one that brings high rental yields
or one that I’m hoping will increase in value so 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?
All of these questions will help you formulate your strategy and lead you closer to the answer of whether or not you can afford the type of investment property that fits into your longer 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, and bank fees and maybe mortgage lenders’ insurance depending on the size of your deposit.
You should do research into the area you’re thinking of buying in 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, will you 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 you for peace of mind).
From the bank’s perspective
Once you’ve crossed the first two hurdles and decided that, yes, an investment strategy is a killer idea in my long-term financial plan and I feel comfortable that I can afford my mortgage and expenses without it intruding too uncomfortably on my lifestyle – you then have to jump the final hurdle: does the bank think I can afford an investment property?
The best way to answer this question is to ask the bank – and if you get "no" from one bank, don’t forget to try another and don’t forget to look at credit unions and smaller banks to get your loan through.
Compare your options
Get a mortgage broker to help you compare
Research investment loans yourself
Calculating your servicability
Often the banks will use the word servicability 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
work out your investement 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 or not will become clear.
What is next?
How to choose an investment suburb
Considerations when buying a furnished investment property
Want to build wealth investing in property?
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