Preparing Yourself for Auction
September 21, 2019
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Are You Financially Ready for an Investment Property?

When property values decrease, as they have been in recent times, it can be awfully tempting to seize the moment and invest in property. After all, you get more for your money. But will a home loan lender agree that you can afford a property investment?

Here are five important questions to ask yourself before you decide to invest.

1. Do You Have A Deposit?

The larger your deposit, the lower amount you will have to borrow. But as the interest paid on an investment loan can be typically claimed as a tax deduction, property investors often have less incentive than home owners to put up a big deposit.

In fact, it might not be vital to have a 20 per cent deposit. Many lenders only need a 10 per cent deposit, sometimes even less, though this will mean paying them lenders mortgage insurance (LMI). SDK Finance can explain the minimum deposit you require to get started with property investment.

2. Can You Unlock Your Home’s Equity?

If you’re a current homeowner it might not be important to provide a cash deposit in the first place. The equity built up on your current home can often be used instead of a cash deposit. This allows cash savings to be preserved for other needs, like refurbishing your investment property.

Typically, the maximum home equity value you can use as a deposit is usually calculated as 80 per cent of your current home’s value, less the balance of your home loan.

3. How Well Do You Understand Your Cash Flow?

Purchasing an investment property requires more than a deposit upfront. You also have to be able to manage other purchase costs including legal fees and stamp duty, as well as ongoing expenses such as insurance, repairs, rates and loan repayments.

Rental income will assist in covering part of the standard costs. With negative gearing, you can claim any annual loss on the property as a tax deduction. This is as long as the place is tenanted or available to rent. This makes owning an investment property far more affordable.

But, you still have to able to pay for these expenses as they come. This is why it is important to know your own cash flow. Calculate your income and compare it to the regular costs of owning your investment property. Allow some wiggle room for unexpected expenses including repairs.

Your lender will see that your cash flow can safely handle purchasing a rental property, so it is important to do this review yourself before applying for a home loan. SDK Finance can help you crunch those numbers.

4. Is Your Income Suitable?

There’s an important reason home lenders like to view your income. It is because your rental property may experience periods of vacancy, and that’s when your regular income will have to cover the repayments on your loan.

If you work for a company, a contract of employment or most recent payslips will suffice as proof of income. If you’re self-employed, you will typically require your most recent tax returns as proof of income evidence.

5. Will an Investment Property Work for Your Future Plans?

Residential property is typically regarded as a long-term investment plan. You should be prepared to keep the place for at least five years.

Therefore, your property has to fit with your future plans. Of course, we can’t predict what awaits us around the corner, but it is a good idea to have a strategy in place for your rental property to better understand the role it will play in the future.

 

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