Am I In A Position To Invest In Property?

When considering whether to take the plunge and invest in
property outside of their family home, many question their ability
to save a deposit within a reasonable period of time when they
already have the commitment of regular repayments on their
home loan.
Have you considered that you may not need a deposit?
Maybe you are in a better financial position than you think to be
able to invest in property.
So what do you need to get started?
1. equity in your existing home, and
2. surplus income to meet the shortfall in expenses after your
tenant’s contribution.
Here’s how it works
If you already have equity in your existing home or another
investment property, you may be able to use your accumulated
equity to purchase an additional property. Let’s use an example to
explain this process.
Your lender will generally allow you to borrow up to 80% of the
value of the property (unless you want to pay lenders’ mortgage
insurance (LMI)). To keep things simple we will assume that you
can only borrow 80%.
In our diagram, you have $250,000 in equity in your home that
could be used as security to purchase an investment property.

Potential property portfolio

Let’s now assume that you purchase an investment property
worth $500,000. You also need to consider the upfront purchase
costs. These vary from state to state so we will assume 5% of
the total purchase price (or $25,000), resulting in a total cost of
$525,000.
You will be able to use 80% of the investment property as security
(being $400,000). You will then require an additional $125,000 that
can be utilised from your existing home allowing you to borrow
the full $525,000 without a deposit.

Your property portfolio will now look like this:

Adding in $500k for total investment property value, your tenants
and the potential to receive a tax refund associated with claiming
tax deductions1 for the investment property will help pay for the
new loan, however sometimes there could be a shortfall to be
serviced. This should be taken into account when borrowing to
ensure that the loan on the new investment property and your
existing property can be serviced within your budget. You also
need to allow for any unexpected interest rate rises.
Then all you need to do is sit back and let the property take its
course. Hopefully normal market conditions will deliver capital
gains, generating additional equity over time.
Once you learn this strategy you can repeat it as
often as you want, provided you can repay the
borrowings.

*Please consider seeking independent legal, financial, taxation or other advice to check how this information relates to your unique circumstances.