Property is a popular investment option for many Australians. Many clients who come to Keypoint are not sure if they are financially ready to purchase an investment property, especially if they have a current mortgage on their own home. At Keypoint we can help assess your financial readiness.
There are many reasons why people purchase an investment home. Some of these reasons include that they:
– see property investment as a good long term investment,
– have been advised by their accountant or financial adviser that borrowing for a property investment has tax benefits (negative gearing),
– have paid off or substantially reduced their current home loan, or
– are professional home investors building a portfolio of properties.
Information sourced from the Australian Taxation Office (ATO) indicates that in 2011 almost one out of every five taxable income earners had at least one investment rental property. Approximately 73% of these investors had only one investment property. Only 8.3% accounted for professional investors who had three or more properties.
Deposit vs Equity
Many investors use equity they have in their current home or homes to purchase an investment property. Where negative gearing is an important element of their investment strategy, this allows them in many cases to borrow the total purchase price of the house and include other purchasing costs such as stamp duty. At the same time they can avoid the additional cost of lender mortgage insurance (LMI) when borrowing over 80% loan to value ratio (LVR). When using equity in your current home one of the key decisions will be whether to cross collateralise your current property with the investment property or not.
First time investors with no existing home or insufficient equity in their current home, will need to have a sufficient deposit to purchase an investment property. Some lenders will lend up to 95% of the value of the investment property. The 5% deposit may not be enough and the following also needs to be considered:
– Stamp duty costs,
– Other purchasing costs such as legal, inspections, government, and lender fees,
– The deposit may need to be genuinely saved,
– Some lenders only offer a maximum of 90% LVR,
– Some lenders will allow 95% LVR but you need to demonstrate 10% genuine saving,
– Some lenders will only allow a maximum 95% LVR including any additional LMI costs,
– Some lenders will only allow a maximum of 2% of the LMI cost to be added to the loan.
Contact us now at Keypoint and we will be able to assist you with finding a lender and investment solution that suits your needs.
Can I afford an investment property?
Each customer has a unique financial position that will need to be considered when assessing their ability to afford the financing of an investment property. Nevertheless, for investment properties, lenders will consider at least 80% of the rental income and most will add back the benefits of the net interest cost for negative gearing benefits.
Contact us now to discuss your ability to purchase an investment property.
When purchasing an investment property it’s also important to consider the additional ongoing costs that you will need to budget for. Costs to consider include:
– Council rates
– Water (in many cases the tenant will pay for the water usage component)
– Strata fees (if purchasing a strata title property)
– Agent management fees
– Land tax (if applicable)
– Repairs and maintenance
Keypoint can help you with the financing of your investment home but you will need to do your homework when it comes to what type of property and location you choose. A good start is to do some research on the internet and talk to family and friends who already have an investment home. If you’re a first time investor you will start to hear terms like rental yield, capital growth, and rental vacancy. Be wary of property investment seminars that are really a front for spruikers trying to sell their own properties.
The following websites are a good start:
– Australian Securities and Investments Commission’s (ASIC) Money Smart site
– RP Data’s MyRPData site http://www.myrp.com.au/
– Australian Property Investor (Magazine) site http://www.apimagazine.com.au/