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 not sure how or what the next steps are. 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:
I’d like to start with that I always invest in lower priced properties – $349K is the maximum I have paid for a recent property, down to as low as $219k a few years ago. So as you can see I invest in the entry level price bracket.
Why???
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:
These groups make up the majority of buyers in the entire market place. That price point also targets the majority of tenants who can afford that level of rent = less vacancy time.
Makes sense…
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 3 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.
Surprised???
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 that are currently renting for $550 rent per week… This couple has saved a $50k in savings which they have saved over 5 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 dont know what cash flow positive means, we 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 5% currently and using a cash deposit, this is easily achievable.
But from a lenders 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:
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 $200k. 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. Our current investing locations receive this, and better.
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 $10k 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???
Well the biggest fear you should have is not knowing wHere to invest – and this is wHere you need to have ethical professionals help you through the entire buying process. A good buyers agent is worth their weight in gold… now, wHere can you find a good Buyer’s Agent???