How much do you need to become a property investor?

Make it a point to document the set budget through folders or a spreadsheet, then monitor and assess the changes transpiring over time to have an idea on how to allocate money accordingly once the investment journey begins.

Knowing their capabilities and limitations based on their personal budget can ultimately help budding investors evaluate loan particulars and choose which of the available funding options will work best for them.

Investment budget

Deposit

As of October 2019. median house prices in Sydney and Melbourne range from $808,000 to $1,109,989. Other big markets including Perth, Brisbane, Adelaide, Hobart, Canberra and Darwin have median prices ranging from $525,000 to $730,869 – Canberra being the most expensive and Adelaide being the most affordable.

Fortunately, property investors don’t have to pay for all of that in cash. Banks and other lenders usually require only 10 per cent to 20 per cent of the purchase price as deposit. Some lenders may require less or more depending on the existing lending regulations and their own guidelines.

A higher deposit can increase the investor’s borrowing power and keep their loan-to-value ratio (LVR) low, providing more safety buffer as it allows them to liquidate or refinance readily, but it may reduce their potential to build a big portfolio as it eats into your capital. Moreover, since the average time it takes for a buyer to save up for a first deposit is four years, it may also delay their wealth-creation journey.

On the other hand, a lower deposit helps them save capital money and gets them into the market sooner, thus providing more opportunities to enjoy the benefits of passive income and capital growth. However, it may also require them to pay for additional costs such as the lender’s mortgage insurance, which protects the lender in the event that the borrower defaults on the loan.

In order to double the power of your deposit, avoid being limited to looking at capital cities or the “prime markets” like Sydney and Melbourne. Australia is teeming with real estate opportunities as it consists of 10 million dwellings spread across over 500 local councils. After all, “expensive” and “capital city” do not always translate to “good cash flow and capital growth”.

Stamp duty

Stamp duty is a tax imposed by state and territory government on asset acquisitions. The amount depends on the jurisdiction and property value and may range from $20 to tens of thousands of dollars. The purpose of the purchase – whether for investment or occupancy – can also influence the charges. Stamp duty is usually paid by the buyer at the time of purchase or within 30 days of settlement.

As the value of the property affects the amount of stamp duty to be paid, expensive properties generally mean a higher stamp duty rate. There are discounts in place for first home buyers and low-income earners, subject to different eligibility requirements.

Smart Property Investment’s stamp duty calculator takes all the said factors into account and computes your mortgage registration fee and transfer fee aside from the stamp duty on property.

Pest and building inspections

These inspections will give an in-depth look on the the quality of the property, thus warning potential buyers against any existing structural faults and possible issues in the future. Inspection fees can cost around $400 and above, depending on the size of the property.

Conveyancing fees

This fee will be paid to the legal representative who will facilitate the purchase of the property as well as any title searches. The cost will vary from business to business.

Insurance

Some of the insurance costs that need to be factored in are landlord insurance, which covers the property’s building and internal structure as well as the investor in the event that the tenant defaults on payments or damages the home; mortgage protection insurance, which covers you in case you’re not able to make the required repayments due to unexpected circumstances like loss of job, illness, injury or death, and; lender’s mortgage insurance, which is typically required by lenders if you are borrowing more than 80 per cent of the property’s value.

Ongoing costs

Aside from the one-time costs paid upon purchase, the investor also has to consider the ongoing costs of owning an investment property. These include loan repayments and interest charges, council rates and land tax, water rates, insurance, body corporate fees, repairs and maintenance costs, property management fees and tax on rental income.

To minimise holding costs, consider simple saving strategies such as self-managing properties, taking advantage of tax benefits and reviewing investment structures – holding a property in trust or through SMSF will incur different costs and deductions compared to holding a property in your name.

Savings buffer

Since some of the ongoing expenses could be unpredictable, like repairs and maintenance and interest rate charges, having a buffer can help the investor avoid unnecessary financial sacrifices and achieve a balance between financial and lifestyle needs. Periods of vacancy and unexpected life changes where the primary income could be affected must also be taken into account when establishing emergency funds.

What is your borrowing power?

Just how big an assistance can banks and lenders give an investor? Basically, an investor’s borrowing power or serviceability depends on their income, financial commitments, current savings and credit history.

Before reaching out to lenders, consider the factors they might take into account, including annual income and monthly expenses, the current interest rate, the type of loan being applied for, as well as the type of repayment and loan term and the estimated monthly repayments. Most lenders will ask the borrower to provide official documents to prove their income.

In general, repayments should not exceed 35 per cent of your gross income. The borrower’s employment status and genuine savings can also affect their borrowing power.

Lenders use different methods to determine borrowing power or serviceability, including:

• Net surplus ratio: Uses your current debt, proposed dent and living expenses for calculations
• Debt servicing ratio: Assumes that a third of your income goes to tax and another third of it goes to living expenses. The remainder is assumed to be dedicated to mortgage repayments. It does not consider negative gearing and living expenses.
• Surplus or uncommitted monthly income: Determines available income after subtracting all monthly expenses from your gross monthly income.

Meanwhile, the amount of loan that the borrower can get may be influenced by the size of deposit, the LVR they plan to invest at and other guidelines set by their chosen bank or lender. Some lending institutions can give up to 95 per cent of the property value while others tend to stick to the more common 80 per cent or lower.

Investors can determine an ideal maximum purchase price by using the following formula:

Available equity (current value of home x LVR - total mortgage) + savings/entry costs (based on percentage of deposit and 5 per cent buying costs) = maximum purchase price

Aside from calculating serviceability based on salary, incomes, annual expenses, loan and credit card expenses and other similar expenses, Smart Property Investment’s borrowing power calculator also gives an idea of how an investment property may affect an investor’s day-to-day expenses by providing a breakdown of the possible monthly repayment amount.

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