Can you afford an investment property?

When property values fall, as they have in recent years, it can be tempting to seize the moment and step into the market. After all, you’ll get more bang for your buck.

But will a lender agree that you can afford a real estate investment? Here are five questions to ask yourself to know if the time is right for you buy a rental property.

1. Do you have a deposit?

The bigger your deposit, the less you have to borrow. But as the interest paid on an investment loan can normally be claimed as a tax deduction, investors often have less incentive than home owners to stump up a large deposit.

The deposit on an investment property can often be 10%, sometimes less. Paying less would mean paying lenders mortgage insurance (LMI).

Your Mortgage Choice broker can explain the minimum deposit you need to get started with an investment property.

2. Can you unlock the equity in your home?

If you’re a home owner it may not be necessary to provide a cash deposit at all.

The equity built up in your home can often be used in lieu of a cash deposit. This allows cash savings to be preserved for other purposes, like a few renovations on the investment property.

As a general rule of thumb, the maximum home equity you have available to use as a deposit is typically calculated as 80% of your home’s value, less the balance of your home loan.

3. How well do you know your cash flow?

Buying an investment property calls for more than an upfront deposit. You also need to be able to manage other purchase costs such as stamp duty and legal fees, as well as ongoing expenses such as rates, insurance, repairs and maintenance and loan repayments.

Rental income will help to cover part of the regular costs. And thanks to negative gearing, you can claim any annual loss on the property as a tax deduction – as long as the place is tenanted or available to rent. This makes owning an investment property more affordable.

We've created a Guide for beginners that covers the steps you need to take to get into Property Investment. It covers your planning stage, ensuring you have enough for a deposit, caluclating costs and more.

However, you still need to be able to pay for these expenses as they arise.

That’s why it’s important to get to know your cash flow.

Add up your income, compare it to the regular costs of owning your investment property, and allow some wiggle room for unexpected expenses like repairs.

Your lender will check that your cash flow can comfortably handle owning a rental property, so it pays to do this review yourself before applying for a loan. Your Mortgage Choice broker can help crunch the numbers.

4. Does your income shape up?

There’s a good reason why lenders like to see evidence of your income: Your rental property may experience periods of vacancy, and that’s when your regular income will need to cover the repayments on your investment loan.

If you work for an employer, several of your most recent payslips or a contract of employment will usually be sufficient proof of income. If you’re self-employed, you’ll typically need at least your two most recent tax returns as evidence of annual income.

5. Will an investment property fit your future plans?

Residential property is usually regarded as a long term investment. Ideally, you should be prepared to hold onto the place for at least five to seven years.

This means a property needs to fit with your future plans. Sure, none of us can predict exactly what lies around the corner, but having a strategy for your rental property makes it easier to understand the role it will play in your future.

Taking on an investment loan doesn’t need to be scary, it’s just a matter of knowing your situation and crafting a strategy around it. Talk to your local Mortgage Choice broker today.