ARTICLES > Can I Afford an Investment Property?
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Can I Afford an Investment Property?
So, if your home is worth $400,000 you can have a mortgage of up to 80% of that amount. 80% of $400,000 is $320,000. That means, you may be able to get a loan of up to $320,000 against your property. So, if you already have $200,000 to pay on your mortgage, you may be able to top-up that loan to $320,000 giving you a $120,000 deposit. The second question is, What can I afford to buy? Banks will, in general, loan up to 70% on an investment property. So, your deposit must make up at least 30% of the loan. That means, if you have a $120,000 deposit you can afford an investment of up to $400,000. What this means is that, if you spent all the money at your disposal on a property, you would have a total debt of $600,000 spread over two properties valued at a total of $800,000. The third question is, Is that all there is to it? The answer is, "no." The bank will have other questions and criteria that need to be met, such as: ►Do you have any other debt?NOTE ALSO - the above figures are approximate and do not take into account legal fees, bank fees, valuation fees, etc. The fourth question is, is property a good investment for me? Many New Zealanders have done well out of property investment which has lead others to believe that it is a safe and foolproof way to invest and make money. There is no doubt that it is usually a relatively low risk way of making money, however, it is not without pitfalls as a number of investors have recently discovered. If you decide to invest in property there are a number of factors to take into account. Primarily, it is vital that you are certain you can cover the repayments on the property and any maintenance that property may require. Also, make sure you have a "buffer" in your finances so that, if interest rates go up, you can continue to make your repayments. The upside of property investment:►in a typical market cycle there is money to be made.►there are tax benefits to be gained. ►it is low risk. The downside of property investment:►to make money your investment needs to be long term - many investors say at least 10 years in a good market, up to 25 in a slow market.►if your cash-flow becomes too stretched it can mean having to sell a property prematurely and that can have severe effects on your finances. You may have heard that the number of mortgagee sales in recent times have been close to an all time high. I read that almost three-quarters of those sales were rental properties where cash-strapped investors were forced to sell. Finally, if you are considering property investment for the first time, make sure you speak to your solicitor or an accountant. There are things like Trusts and LAQC's that can maximise your investment but that must be set up correctly for them to function well.
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