Can I afford an investment property?

Can I afford an investment property?

You’ve either recently made the decision to buy an investment property or just found an investment property that you would like to buy.

Congratulations, this is a huge step!

Now you need to know what you can afford to borrow or if you can afford to buy the property you’ve just found.

You’re in luck. This article will answer your question can I afford an investment property and point you in the right direction to get started.

The first thing you need to do is find out how much borrowing capacity you have.

This will enable you to:

  • Identify how much you can afford to borrow
  • Identify how much your prepared to spend
  • Refine your property search based on price

The first step in finding how much you can afford to borrow is going to speak with a couple of bank managers or mortgage brokers.

They will look at your current financial situation and let you know how much you can afford to borrow.

Remember to get a number of opinions. I’ve had bank managers tell me I couldn’t service any more debt, then bought three new properties in the next 9 months with the support of my mortgage broker.

There are a range of documents you’ll need to prepare for your lender or broker including:

  • Copy of drivers license
  • Bank statements
  • Credit card statements
  • Summary of current debt
  • Credit cards
  • Car loans
  • Other
  • Pay slips
  • Tax return (last 2 years)
  • Property contract, or
  • House and land contracts
  • Information on any other properties you own
    • Lender
    • Purchase price
    • Current value
    • Rent

The more information you can provide, the better the story you can tell.

Please download a copy of Pumped On Property’s FREE home loan checklist here.

The next thing you’ll need to do is identify a price range.

It’s important to remember that just because you can borrow $1,000,000 doesn’t mean you should spend it all on one property.

Think beyond this property to your 2nd, 3rd, 5th, 10th purchase and remember that each property you buy is either getting you closer or further away from you goal of spending more time with the people you love and achieving financial freedom.

Its important to take into account the following costs when considering how much to spend on your first / next investment property:

  • Property cost, or
  • House and land costs
  • Deposit
  • Borrowing costs
  • Lender legal fee
  • Borrower legal fee
  • Property stamp duty
  • Registration of mortgage
  • Registration transfer
  • Progress payment fees
  • Registration discharge
  • Other expenses
  • Lenders mortgage insurance

For most investors the major determining factor of how much can I afford to borrow will be their deposit.

See my recent article should I use a big or small deposit when buying a property.

The next step is to undertake a cash flow analysis and to determine you can actually afford to hold a property once you have bought it.

Your cash flow analysis will be completely dependent on whether you’re planning to live in the property yourself or rent it out.

If you’ve decided to live in the property you’ll need to take into account the following numbers in your cash flow analysis:

Income:

  • Your wage, or
  • Your business
  • Any additional passive income you earn
  • Any additional properties you own

Outgoings:

  • Interest on your loan (many investors fix their mortgagees and change them to interest only to control and minimize their holding costs)
  • Council fees
  • Water
  • Electricity
  • Maintenance costs
  • Strata fees (if it’s a unit or a townhouse)

If you plan on renting out the property you’ll need to take into account the following numbers in your cash flow analysis:

Income:

  • Your wage, or
  • Your business
  • Any additional passive income you earn
  • Any additional properties you own
  • Rental income
  • Depreciation
  • Tax advantages

Outgoings:

  • Interest on your loan (many investors fix their mortgagees and change them to interest only to control and minimize their holding costs)
  • Council fees
  • Maintenance costs
  • Management costs 9generally 7 – 9% of gross rental yield)
  • Strata fees (if it’s a unit or a townhouse)

Again its important to remember that just because you can afford to buy and hold a property does not mean you should.

Make sure you take into account:

  • Interest rate rises
  • Periods with out tenants
  • Adjustments in your rental yield

There are so many variations when it comes to deciding if you can afford to buy an investment property. Your best bet is to go and see your bank manager and mortgage broker and discuss your plans for purchasing an investment property. Ask them to be honest and to run a range of scenarios with you and you will begin to get an understanding of what you can and cant do.

Unfortunately there is rarely consistency between bank managers and mortgage brokers.

You can do all of the analysis in the world, but sometimes you need to jump into the market and learn from experience.

Here’s an example where I’ve had to learn if I could afford to buy an investment property the hard way.

In 2013 I found a 4 bedroom property 5 rooftops from the ocean on the Sunshine Coast in QLD for $375,000. I went to my bank manager and she told me I couldn’t afford to buy the property (I currently owned three other properties at this time). Unfortunately I had to let the property go. Two weeks after it was sold I found a new mortgage broker who told me I could borrow $430,000 that week. The reason he could do this was because he was working for me, not the banks and had a range of more flexible lenders to choose from. I just found out that this beach shack just resold for $500,000. Dam!

 And here an example where walking away from a deal just because I could afford to buy was the right decision.

In 2011 I was looking to buy my first property with a couple of friends. I found a 4-bedroom house on the Sunshine Coast in QLD for $435,000. After submitting a formal offer and signing a contract the real-estate agent told us that he had sold the property to another bidder, which I now know is illegal in QLD. We were pissed off at the time. A month later we found and bought a unit with water and city views for $360,000 in the Sutherland Shire in Sydney. Little did I know at the time but the Sunshine Coast market was about to go flat with the GFC. What’s more this property has not made a single cent in capital gains in four years, where as our unit made a $75,000 gain in 4 years.

The reason I share these stories with you is to confirm that sometimes you will have to learn the hard way and other times you will dodge a bullet in the property market, but most of the time you only learn these lessons by being in the market.

If you still need to know if you can afford to buy an investment property I would be happy to introduce you to my personal Mortgage Broker Aaron. Please get in touch here,

The information provided in this blog is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance strategies. In all cases we recommend you receive professional financial advice for your own personal circumstances.

Ben Everingham

About

Ben founded Pumped On Property after building a multi-million dollar property portfolio over a 5 year period. His mission is to show you how to replace your income through property investing so you can do what you love…full time.