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Now the time for first property investment?

16/03/2011

For those who purchased their first home in recent years, it could be a case of ‘no-better-time-than-now’ to consider taking their first steps into property investment.

According to Smartline Personal Mortgage Advisers, many who bought into the property market in the past five years or so and have built up substantial equity in their home may now be well placed to purchase a second property.

This – coupled with flat property prices, a buyers market nationally and increasing rental returns – could put many people in the ‘box seat’, according to Smartline Managing Director Chris Acret.

“It could be that the first home buyers of recent years are now well placed to become the first investment property buyers of 2011,” he said.

“These are the people that bought within their means, have been working hard to pay down their mortgage and who have benefitted from steady increases in property values over the ensuing years and, as a result, now have access to significant equity.” 

As an example, a property purchased for $300,000 five years ago would conservatively be worth around $400,000 now (assuming an annual increase in value of 5-7%). The couple that bought this property paid a 10% deposit and took out a home loan for $270,000.

After five years of repayments, the loan balance is now $245,000. With their lender allowing them to borrow up to 90% of their property’s value, they now have access to over $100,000 of equity.

They decide to purchase a second property – their first investment property – worth $400,000. They add approximately 7% of the home’s value to fund fees and charges meaning they require $428,000 to fund the purchase.

Assuming they take out a loan for 90% of the property’s value, the loan amount will be $360,000 requiring them to fund the shortfall of $68,000 against the available equity of $100,000 in their home, which they can do comfortably.

Mr Acret said many first-time investors were held back by mistakenly seeing an investment property as double the cost of their owner-occupier mortgage.

“Many people think that while they can manage their own mortgage, they’re not in a position to fund a second property,’ Mr Acret said.

“They’re looking at a second property as ‘double the commitment’, when in reality that’s not necessarily the case with the benefit of having a tenant pay a large part of the mortgage and associated taxation deductions.”

However, Mr Acret said it was a move that should be carefully considered and thoroughly researched as it was very much a long-term commitment that could impact on people’s ongoing cash flow.

“While the equity might be there to fund the initial purchase, people also need to be mindful of the ongoing servicing of the debt as a result of any shortfall in the income generated by the property and the associated expenses,” he said.

“As a result, it is essential for prospective investors to speak with both an accountant and a mortgage adviser to understand the ongoing financial commitment.”

A good mortgage adviser should be able to assist in compiling an indicative cash flow analysis of your investment property over time, including loan repayments, strata fees, management fees, maintenance costs and property taxes.

And with speculation of further interest rate rises in 2011, discussions should also focus on the possibility of applying a fixed rate to some or part of the loan which offers some protection against interest rate increases.

“Property investment isn’t necessarily for everyone,” Mr Acret said. “But for those people looking to build long-term wealth, the equity sitting in their current home could provide the perfect springboard.”

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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