The first step to take when looking for an investment property

When deciding to buy an investment property, a common place to start is by trawling through property websites. However, there is a more important step that needs to be taken before jumping headfirst into the market – that is understanding your finances.

While it might not be as fun as your property hunt, it is important because it will dictate the type of properties you can buy.

So what do you need to know when buying an investment property?

When it comes to investing in property, there are two key aspects to your finances – your deposit and your income. In a nutshell, your deposit will help you buy the property while your income will help you hold the property over the long term.

Your deposit

Many people will be aware that you’ll typically need a 20% deposit to buy an investment property, however there are some options that allow you to have a lower deposit, such as taking out lender’s mortgage insurance (LMI).

LMI is an insurance policy that you have to pay for, however it protects the bank in case you can’t meet your mortgage repayments. LMI is generally either a one-off premium or a fee added to your loan amount.

Your deposit can comprise money that you’ve saved in your bank account as well as using equity from your existing home, or a mixture of both.

What many people often overlook, though, is their income and ability to service the loan.

Understanding and managing your disposable income

Your disposable income is how much money you have left over from your weekly income once you’ve paid all your expenses, such a groceries, utility bills, home loan repayments and entertainment spending.

It’s important to understand your disposable income as this money will help you meet the holding costs of buying an investment property.

As the name suggests, holding costs are any expenses that come with owning an investment property, such as your loan repayments, property management fees, council rates, strata fees, property insurance and maintenance expenses etc.

The rental income you receive from the investment property will help to cover part of your holding costs. In some cases, the rental income may even cover all of the holding costs, but this will depend on the type of property, the prevailing market conditions and other factors. Learn more about rental income.

If the rental income doesn’t cover all your holding costs, though, then you’ll need to chip in some of your own money to meet these expenses. This is why it’s important to understand your level of disposable income.

Regardless, it’s important to know your disposable income and how it will be impacted if circumstances change, such as rent reductions, vacancy periods or increases in interest rates etc.

Build a household budget

The best way to gain a good understanding of your disposable income is by completing a household budget. Aside from helping you understand how much money you can allocate each week to holding an investment property, a household budget will let you better understand your expenses, identify where you might be able to make savings and is also a good opportunity to build in contingency funds for a rainy day.

For a better understanding of your finances and borrowing power, speak to a Bankwest Home Finance Manager today.

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Things you should know 

The information contained in this article is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this article without first obtaining specific professional advice. Also to the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accept no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this article.