The next instalment in our frequently asked questions series is probably one that we get most commonly:
How much money do I need to invest in property?
And the short answer is – it varies! But, it might not be as much as you think.
We need to assess quite a few things about your individual financial position to determine whether you can invest in property. The 3 main things are:
- What sort of Deposit you have.
- Your current income and liabilities.
- What sort of property you want to buy.
Deposit
When purchasing property in Australia, lenders require you to put down a deposit to secure the loan. When investing in property, this is usually 20% of the purchase price of the property.
There are 4 different ways you can come up with a deposit when it comes to investing in property:
- Standard ‘Mum & Dad’ Equity – This is traditionally equity that has built up in the home that you own. E.g. the house you live in is worth $650,000, but you only have a mortgage of $400,000. We can only ever leverage up to 80% of the equity at any time, so this then leaves us usable equity of $120,000.
- Cash Deposit – This is pretty much as it sounds. It’s cash you’ve saved up to use as a deposit. And the phrase “cash is king” always rings true!
- Guarantors – This is most commonly young people who leverage the usable equity in their parents’ homes as a deposit.
- Superannuation – Some people who have their superannuation in an SMSF (self-managed super fund) can choose to purchase an investment property using this as their deposit.*
There are some exceptions to the 20% rule when it comes to a deposit, however. If you are a practicing Doctor or medical practitioner, some lenders will loan you up to 90% of the property value – meaning you will only need a deposit of 10%. Other people may borrow up to 90% as well, but Lenders Mortgage Insurance will become payable.
Current Income & Liabilities
This is what we call ‘Serviceability’. Essentially it’s how much cash you have coming in, versus what you have going out.
We need to know your current income, and lenders will often ask for your last 3 pay slips to verify this. If you are self-employed, you’ll probably need 2 or more years of financials to show.
We also need to know what your liabilities are. This is money going out, and can include things such as your home loan, car loan, rental payments, credit card debt, personal loans, and more.
The Investment Property
Next up, we need to consider what type of property you can invest in. We need to look at what the value of that property is to determine the deposit you’ll require, and to estimate the costs that you’ll need to consider. These costs include bank fees, stamp duty on the land (which varies state to state), and conveyancing. A good (over)estimate for costs is usually 5%.
Example
We’ll use the example of a fairly ‘standard’ type of property that our clients tend to invest in – a Torrens titled, 3 bedroom, 2 bathroom home, valued at approximately $400,000.
To invest in this property, you would require a deposit of 20% ($80,000), plus costs of 5% ($20,000).
How much should I be earning to invest in this property? There is no direct answer on this one because it depends on liabilities and other such things. But it is safe to say that if you were earning in the realms of $60,000 – $70,000, your application for this investment property would be considered.
And keep in mind – investing in property isn’t just for the ‘wealthy’.
(Statistic sourced from https://www.facebook.com/ljhooker)
We’ve helped clients from all walks of life in many different financial positions fulfil their property investment dreams. You can read some of our client testimonials, and if you’d like to see whether investing in property is possible for you, just give us a call or fill out our contact form. We like to start with coffee.
*Please note that this article is general in nature and none of the above is intended as advice. You should always seek the advice of professionals when it comes to financial services.