Can I Afford An Investment Property?

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Sounds like a simple question, right? It is, but the answer is not. Whether you can afford an investment property will always come down to your individual circumstances. While there are plenty of real estate agents/developers/lenders who’ll do their best to sell you on the affordability of investment property, the purchase price is just the beginning of your investment.

Doing your homework before you leap into a property investment is essential. Before you start, make sure you’ve put plenty of thought into an investment strategy that reflects your personal goals and ambitions. Ask yourself questions such as:

  • Why do you want to buy an investment property?
  • How will an investment property fit into your longer-term financial strategy?
  • What are your investment goals?
  • Are you looking for a property with high rental yield or one that will grow in value so that you can sell it at a profit in five or ten years? (And yes, you should be looking at no less than five years).
  • Do you want to renovate to add valueor would you rather a property that can attract tenants immediately?
  • Do you want to buy a house or an apartment?
  • What will be the interest rate on your investment home loan?
  • What is your honest budget?
  • What are your expected investment costs and rental gains?

A common mistake is to underestimate the costs of owning (and maintaining) an investment property. From a practical perspective, you must factor in all the associated fees and costs you’ll encounter during the purchase transaction and the ongoing management and maintenance of the property.

That list of expenses includes initial costs:

  • Deposit
  • Loan establishment fees
  • Mortgage insurance
  • Connections
  • Stamp duty
  • Legals

And ongoing costs:

  • Insurance (Building and landlord) - Annual payment
  • Yearly mortgage fees - Annual payment
  • Land tax - Annual payment
  • Council rates and government taxes - Annual payment
  • Body corporate fees - Quarterly payment
  • Mortgage repayments – Monthly payment
  • Utilities – Monthly payment
  • Property management – Monthly payment
  • Repairs – Ongoing

Calculating a comprehensive list of expenses will give you a much clearer and more meaningful indication of affordability.

If an investment property does seem within your means based on the above calculations, then it’s time to dig in to some research. First and foremost is investigating the suburb or neighbourhood you’re thinking of buying in to find out what rental yield is realistic for the type of property you’re looking at.

Next is to consider the gap between rental income and the mortgage repayment. To calculate this, make sure you include all associated expenses: TOTAL EXPENSES per month minus RENTAL INCOME for a month. (Don’t forget that expenses can vary from month to month—particularly if emergency repairs are required).

Can you cover the difference comfortably?

Does the figure feel manageable to you?

It’s impossible to predict every expense you may incur as a landlord, but it’s important to think about what level of risk you’re prepared to tolerate as an investor. For instance, will you feel comfortable if you can't find a tenant for one month, three months or six months?

(Note – landlord’s insurance can cover unexpected vacancies which can bring a certain level of peace of mind).

Will vacancy periods stretch the limits of affordability based on your personal financial circumstances?

As you can see, asking the question, “Can I afford an investment property?” doesn’t come with a simple answer. But, by putting some thought into your individual investment goals and financial position, the answer will become clear.



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