Time for your first property investment?
Is now the right time to buy your first property investment?
The guidance of a quality mortgage broker will shed some light on what could work in your unique situation, but here, we offer some thoughts to get you started.
How much equity do you have in your home?
For those who purchased their first home in the last 5-10 years or so, it could be a case of ‘no-better-time-than-now’ to consider taking your first steps into property investment.
Many of these people have built up substantial equity in their home and 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’.
Let’s look at 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.
An investment property is not ‘double the cost’
Many people think that while they can manage their own mortgage, they’re not in a position to fund a second property, which they see as ‘double the commitment’. 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.
It pays to do your homework and get advice
As with any form of investment leveraging equity to invest in property should be carefully considered and thoroughly researched, as it is very much a long-term commitment that could impact on your ongoing cash flow.
While the equity might be there to fund the initial purchase, it’s important 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.
It’s essential for to speak with both an accountant and a mortgage broker to understand the ongoing financial commitment.
A good mortgage broker 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.
Property investment isn’t necessarily for everyone, but for those looking to build long-term wealth, the equity sitting in their current home could provide the perfect springboard.
