We are getting a number of our clients in their late twenties and early 30s asking about investment properties. They have typically had their own house for a few years and are interested to see if a rental is a good option for them at this stage.
There are basically 2 requirements to see if a rental property is feasible, prior to seeing if it is desirable. These requirements are equity and servicing:
- Equity is the difference between the value of a property and the mortgage owing. Ideally this is kept over 20% across all properties. So if their existing mortgage is $300k and home worth $500k they have 40% equity. If they are looking at buying a $450k rental and borrowing that $450k they would have total borrowing of $750k and houses worth $950k which means total borrowing of 79% which leaves equity at 21%. This 20% equity is not a hard and fast ratio, we have number of clients with equity between 10-20% but this does make life easier.
- Servicing is ‘bank speak’ for how much money you have (or should have) at the end of each month after all expenses and living costs. What a bank calculates may not be that close to actual but you do have to work within their guidelines. In reality there are not that many properties that you can by where the rent will cover the mortgage and all other costs including rates and insurance. You therefore probably want be currently saving/not spending at least $500 a month.
From there it is seeing if an investment property is a good fit for your personal circumstances and wants. The longer you have an investment property the more your result will be predictable, are you willing to be in for the longer haul? Alternatively if it is more of a short-term proposition there is greater risk, do you have the capacity for this or a back-up option. Everyone’s circumstances are different but it is always better spending a little time planning before committing to a significant purchase like an investment property.
