Can I afford to invest in property?
Many would-be investors aren't sure if they can afford to build a portfolio, or where to begin when trying to work out the numbers.
Blogger: Todd Hunter, director, wHeregroup
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As an avid investor, I sometimes forget that there are many people who want to invest but are not quite sure if they are able to.
Maybe they have a home loan and aren't sure how or what to do next. Or maybe those who have children who are getting to the age where they should buy a property but simply cannot afford a home – yet!
So the short answer to my title is that "Yes, most people can afford to invest in property". I am going to go through some typical scenarios which you may well fall into – and if you don’t, then this is your chance to ask me… hit me with your situation (anonymous is fine) and I will come back to you.
We will cover 3 examples:
* We have a home mortgage and have thought about investing
* We currently rent and have a deposit but cannot afford the high property prices where I live
* My children are around 20 years of age (there’s no way they can afford to buy a home currently) and we want to help them somehow
I’d like to start by saying that I always invest in lower priced properties – $349,000 is the maximum I have paid for a recent property, down to as low as $219,000 a few years ago. So as you can see I invest in the entry-level price bracket.
Simple… because it’s the biggest market – when I sell (and I always invest with selling in mind – maybe in years to come but it’s a buying factor) I will be selling to:
* First home buyers
* Second home owners
These groups make up a majority of buyers in the entire market place. That price point also targets a majority of tenants who can afford that level of rent, which equals less vacancy time.
So let’s start with the home owner who has a mortgage of $400,000 and their home is worth $600,000. The husband earns $65,000 per annum and the wife earns $25,000 because she works part time as they have a three-year old boy.
Can they invest?
At first glance, you would expect no they cannot… but would it surprise you to know that they can borrow up to $450,000 as long as they received at least $400 rent per week.
What if they had two children?
Well they could borrow up to $387,000, so yes they could still buy themselves a good-quality cheaper property.
Now in a situation like this we would always do a practical cash flow analysis where you as the investor are told the ongoing costs to make sure it fits in with your lifestyle. We would also recommend that you fix the investment loan and more likely a good part of the home loan so that you have fixed repayments for the next few years. We want to avoid any hidden surprises when interest rates go up.
How about the same couple if they were currently renting for $550 rent per week. This couple has saved a $50,000 which they have saved over five years = around $200 per week.
The fact that they can pay $550 rent per week, plus save an extra $200 already says they can afford it practically, well within their budget as long as they buy a cash flow positive property.
If you don't know what cash flow positive means, well it means that after you receive rent and also receive tax benefits in the means of negative gearing and depreciation on the property, that you receive an income. And that’s after all costs…
With interest rates at five per cent currently and using a cash deposit, this is easily achievable.
But from a lender's perspective with one child they can get a loan up to $410,000.
With a second child, the banks will lend them up to $340,000.
Now because they are using a cash deposit and not equity like in the first example that means they can purchase a property for:
* $435,000 with one child
* $360,000 with 2 children
So as you can see it is very achievable for this couple.
In this instance we would recommend fixing the loan. As the property is cash flow positive, this still allows them to be able to save their $200 per week and most lenders allow extra repayments on fixed loans of up to $10,000 per annum which is very close to $200 per week.
In our third scenario, we have a more mature couple – still earning the same incomes but as they are older their home loan is $200,000. It also means their children are now adults aged 19 and 22 years old. But like all 19-22 year olds they still live at home. Mum and dad want to help them get started and have offered to let them use their home as partial security so they can get a loan to purchase an investment property. The children earn $30,000 per annum.
Can they invest?
Surprisingly, yes they can… they can each buy an investment property for $350,000, as long as the house receives $390 rent per week – and that’s easily achievable.
Again, we would look to fix that loan for a few years to lock in the repayments and have the children make any extra repayments, up to $10,000 per annum.
What better way than to get your children started into property at a young age? They learn the value of a hard-earned dollar and start to create wealth early.
A good tip here to make extra repayments is to set up an automatic direct debit each week or fortnight for the amount you want. That way you never see the money and are making extra repayments on your loan – but never feel any different.
So what’s stopping you???
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