If you’ve decided to buy an investment property, it may be tempting to start jumping headfirst into the housing market.
But make sure you don’t miss this important step: get a solid understanding of your finances.
It might not be as fun as the property hunt, but your income and borrowing power will determine which types of property you can buy.
To get a clear idea of your finances, you’ll need to consider both your deposit capacity and your disposable income.
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You’ll typically need a 20% deposit to buy an investment property. This can come from your savings or equity from your existing home. Learn how to supercharge your savings and use equity to buy an investment property.
If you don’t have a full 20% deposit, you can take out Lender’s Mortgage Insurance (LMI). LMI is an insurance policy that protects the bank in case you can’t meet your mortgage repayments. It’s generally either a one-off premium or a fee added to your loan amount.
Your disposable income is how much money you have left over after all your living expenses are paid – like groceries, utility bills, home loan repayments and entertainment spending.
This is the amount that will tell you whether you’re able to meet the holding costs of buying an investment property, like your loan repayments, property management fees, council rates, strata fees, property insurance and maintenance expenses.
If you rent out your investment property, that rental income could partially or fully cover your holding costs, but this will depend on things like property type and market conditions.
It’s also important to consider how your disposable income, and your ability to meet holding costs, might be impacted by things like rent reductions, vacancy periods or interest rate increases.
The best way to gain a good understanding of your disposable income is by completing a household budget. This will give you an indication of how much money you’ll be able to allocate to an investment property each week, and help you identify where you might be able to make additional savings.
With a better understanding of your deposit and disposable income, you can use our borrowing calculator to find out how much you can borrow for your investment property using savings or equity.
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