How to know if you can afford an investment property
Buying an investment property can be a powerful wealth-building strategy, but only if you go in with your eyes wide open.
While property can generate long-term capital growth and rental income, it also comes with a range of financial responsibilities.
Here’s how to determine whether you’re financially ready to invest.
Understand your borrowing capacity
The first step is knowing how much you can borrow. Your borrowing capacity depends on your income, expenses, existing debts, and credit history. As your mortgage broker, we can assess your situation and give you a realistic picture of what lenders could approve. In addition to reviewing your current income and liabilities, we will consider whether you plan to use a cash deposit or equity from an existing property.
Our job is to run different scenarios to ensure your investment loan remains serviceable even during vacancy periods or when rental income fluctuates. We will discuss with you whether an interest-only, fixed, or variable rate loan suits your strategy (with the guidance of your tax adviser!). Once your financial situation is clear, we will help you get pre-approved for an investment loan, giving you confidence when you start looking at properties and making offers.
Factor in upfront and ongoing costs
Investing in property isn’t just about mortgage repayments. There are significant upfront and ongoing costs to consider. These may include stamp duty, legal and conveyancing fees, loan setup fees, pest and building inspections, and possibly lenders mortgage insurance (LMI) if your deposit is under 20%.
Once you own the property, regular costs can include council rates, water charges, strata or body corporate fees, property management fees, landlord insurance, maintenance, repairs, and land tax in some states. If your property is vacant, you’ll still need to cover these costs without rental income, so creating a buffer to cover at least three months of expenses is highly recommended.
Budget realistically for repairs and renovations
It’s easy to underestimate the cost of repairs or upgrades. Whether it’s cosmetic work to boost rental appeal or essential repairs like plumbing or roofing, costs can quickly add up. We always recommend that our clients overestimate renovation expenses and build a contingency fund.
As your broker, we can help assess whether it’s worth refinancing or topping up your loan to cover improvements. Just be sure to weigh the expected rental return and potential capital growth against the upfront cost.
Understand rental income expectations
When lenders assess your loan application, they factor in projected rental income, but often only at 80 per cent of the rent appraisal to account for possible vacancy and expenses.
Check recent rental listings for similar properties in the area to get a realistic sense of income. Consider the suburb’s vacancy rate and how seasonal factors might impact demand. Some suburbs have high rental turnover or drop in popularity during certain times of the year.
Plan early
When clients engage with us early in the process, we find they gain clarity and confidence for the whole investment property buying journey. The key is planning well, understanding your cash flow and building a buffer for the unknowns.
Talk to us today to find out what’s possible for you.
*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.
