So you’re looking to purchase your first investment property? And why wouldn’t you, it is a tried and tested way to build wealth as well as a relatively easy investment option that you can manage yourself. Naturally there is a range of things to consider and decide before you should delve into your first investment property. The purpose of this article is to examine one of most critical areas to determine first: the budget!
I will be using the purchase of a Residential Investment Property as the example in this case
Before you can start looking at possible rental properties to purchase you need to consider just how much you are prepared to spend. How much you spend will depend on your situation in life. Some may be able to pay cash up front, whilst others may have borrowed as much as they can from the bank to finance the venture.
Firstly, you’ll have a very strong indication of your budget by the amount of money you have in the bank. As mentioned above you’ll either have the money up front or need to gain financing. If you need financing then you’ll still need a deposit first. How much you can borrow against that deposit will depend on a variety of factors, but generally for a house it is 70-80%, and sometimes even 90-95% of the house’s value.
However, deciding how much you can afford to spend is not just about how much the property costs or the weekly cost of the mortgage. There are other factors and costs to consider too.
Costs that will be associated with the purchase of a rental will be such things as:
- Interest and loan repayments if borrowing of funds has been used
- Property rates (environment, council, water, etc)
- Any associated maintenance costs
Now the rent you will receive from your property will go some way to paying for all these costs and in some cases may provide a surplus! If you have had to borrow from the bank to fund this purchase, chances are you may need to “top up” your rental from your own funds to cover the full amount of the associated costs.
For Example: You purchase a $300,000 rental property. You borrow $240,000 from the Bank (80%); Interest repayments on that amount would be $16,800 per year (assuming 7% interest). Rates are $2000 per year and Insurance $500 per year. If we broke this down to a weekly figure it would be $371 per week. Depending on what sort of rent your property will command will determine how much it may cost you on a weekly basis. Bear in mind that the above figure has not allowed anything for repairs and maintenance to the property should anything go wrong. This is something you will need to budget for as well.
By working out what you could comfortable take from your own income each week; you can determine how much you would be able to borrow and spend on an investment property.