Purchasing a rental property is, in some ways, easier than your first home. The majority of investment property buyers have already bought a home before so the process isn’t totally new. Your first home can often feel a little like you’re wandering blindly in the dark. Your first investment property is more like late-dusk.
Additionally, the banks require you to have quite a lot of equity (or deposit) for an investment property, so the decision to purchase can seem less risky than, for example, borrowing 90% against your first home.
So if you’ve decided to purchase an investment property, here are first few things you can do to get the ball rolling.
There are a lot of changes happening with Look Through Companies at the moment so before you start looking to purchase, talk to an Accountant about whether an LTC is right for you.
In the oldie days (pre-2019), an LTC was fairly much a given. It kept your costs and income nice and separate but allowed you to push any losses that resulted from expenses, usually interest on mortgages, through to your personal income tax.
Not necessarily so anymore meaning whether you own through an LTC will very much depend on your situation. Are you relying on the tax losses for cashflow? Would selling your property into an LTC result in capital-gains tax under the bright-line test?
It’s ok if you don’t know the answers to these. A good Accountant will ask you some very simple questions about your situation/expectations and give you the answer you need. Either ‘yes, you need to purchase your property in an LTC’ or ‘no, an LTC isn’t right for your situation’.
If this is your first investment property, the numbers can get a little overwhelming. You may be getting a mortgage of 2 or 3 times what it is now. How will you pay for this if you lose your job? Or if there is a vacancy in the tenancy?
In general, it's important to tailor any investment you make to your risk tolerance. That means, go as risky as you can before losing sleep. But before you lay awake at night thinking about the fact you owe more than $1m, consider that with more debt comes more income.
What new investors often struggle with is that their income may increase a small amount (let's say $30,000 per annum) but their new mortgage will be significantly more (let's say $500,000). It's that large half million that scares people.
But remember, a house isn't like the sharemarket. It doesn't go to $0 (unless you're very relaxed about insurance, petrol and matches). Given enough time, you should be able to sell a house for near what the mortgage is.
In the end, nothing helps make a decision more than a good spreadsheet. Play around with it. What if you lost your income for 3 months? (hint: most investors borrow more than they need - usually $20k - and keep this as a buffer for unexpectedly long vacancies). What if interest rates go to 7%? (hint: the banks actually calculate your mortgage affordability at about 6% so they take this into account).
It's going to seem a little self-serving (but you're this far through the blog, so bear with us!). Very early on in the process of buying, you're going to need to know what you can afford. There's no point in hunting in the $800,000 property range if you can only afford $600,000.
Just as important, you need to find out what is stopping you from borrowing more. Are you limited by your deposit or equity (here's a good blog for you)? Are you limited by income (here's a good blog for you)? Are you limited by your credit history (here's a good blog for you)?
If you're ready to apply for a mortgage, it's also time to look at your Life and Health insurance. You're adding a large amount of debt to your overall financial position and need to make sure you can pay for it. Find an insurance adviser who you like and feel is looking after your best interests. We believe the best advisers only advise on insurance which is why we don't offer it in our company. They should be comparing several different products and choosing the one that suits you the most.
You can start getting ready to buy today by:
It's not always easy to get started. What do you need to know?
We've put together the most important things to know when you're looking at buying your next Investment Property and we are giving it away for free.
... We’d love to get your vote for the People’s Choice Award at the Westpac Business Awards. Mortgage Lab is focused on helping our clients, supporting our people, educating Kiwis and being socially and environmentally responsible. So vote for Mortgage Lab. It’ll only take 15 seconds with no registration required. Pity votes and protest votes are welcome.
For many of us, the game Monopoly informs our earliest understanding of how investment property works. And so we are given to believe that it’s fairly straightforward to grow from…
Surrounding yourself with property experts is not just a good idea; it’s absolutely necessary. And while it sounds expensive, you don’t need to be rolling in cash. In fact, in…
When you think about mortgage broking (okay, you probably don’t think about mortgage broking but stay with us) you probably think about it in the context of buying a house.…