Buying an investment property sounds like a relatively simple proposition.
But how do you know when you’re really ready to invest?
According to the experts, there are some key things you should have in place before you consider yourself ready to make the leap.
You’ve got good equity
Wakelin Property Advisory associate director Jarrod McCabe says having a good level of equity built up in your home may mean you’re in a position to buy an investment property.
“Look at the amount of equity that perhaps you’ve got in your current home,” McCabe says.
“If you’re at a point where you’re fairly comfortable with making your mortgage repayments and you’ve built up a fair amount of equity, you can perhaps then utilise that to open yourself up to the investment market.”
You’re cashed up
If you don’t own a home but have a solid amount of surplus cash, you could also be ready to dive in.
McCabe says a good, entry level investment-grade property will cost you around $500,000, and with banks currently tightening their purse strings, you may need about $100,000 in cash or equity before you’ll be able to borrow the rest.
Make sure you get the right advice before you dive into investment. Picture: realestate.com.au
“In the current market you really typically need close to 20% in cash savings or equity built up – of whatever you’re looking to borrow – because it’s becoming harder and harder to get borrowings in excess of that,” he says.
“We indicate that the property needs to be around $500,000 as an entry point to get a good quality investment, otherwise you’d be compromising on the type of property that you could potentially buy.”
Your numbers stack up
Have you done your research?
That means both research on the property market you want to buy into, and also on your own financial situation.
Metropole Property CEO Michael Yardney says you’ll know if you’re in a position to invest once you drill deep down into your finances.
“Make yourself attractive to the banks. Currently we’re in a credit squeeze – APRA’s restrictions on the banks means they’re tightening the screws and making it much harder for investors to get loans,” Yardney says.
“So you’ve got to look at things like, ‘How steady is your employment? What are your living arrangements – are they stable? Have I got any bad loans or bad credit debt?’”
Make sure you can afford all of the costs linked to an investment property. Picture: Kate Hunter
McCabe says you also need to have a deep understanding of what the costs associated with your investment will be.
“It’s not just (knowing) what sort of mortgage repayments you’re going to have to make, but also understanding some of the other costs that will be associated with it,” he says.
“What are the negative gearing benefits that you’ll get out of the property, but also what are the other costs that you’re going to need to take into account? It may well be building insurance if you’re purchasing a house. If it’s an apartment, then there’ll be owner’s corporation fees. There’s obviously rates that you’ll need to be paying – council and water.”
McCabe suggests basing your loan calculations on an interest rate that’s around 2% higher than the current rate, to provide a good guide as to whether you can afford to invest.
“You don’t want to be stretching to do something in the current market and then have the market levels change and all of a sudden you can’t afford to sustain it. Because they will change at some point in time.”
You’re prepared to be patient
Both McCabe and Yardney say you’re only ready to be an investor once you’re ready to commit yourself to the long haul.
Yardney says most property investors just aren’t prepared to give their investment the time it needs.
“Most property investors fail. 50% of people who get into real estate as an investment sell up within the first five years,” he says.
“Most people never get the financial independence they expect because they don’t build a big enough asset base.”
McCabe says investing in a property should be at least a 10-year proposition.
“It needs to be a long-term investment strategy. There’s no point in buying property and then selling it within five years or so,” he says.
“It’s an expensive exercise, both from a purchasing and a selling perspective, and you have to take all of those costs into account. If you don’t give it a 10-year period, then you’re not giving the property a good opportunity to perform.”
