Finance expert Louisa Sanghera explains just how you can finance the purchase of an investment property, even if you think you can’t afford to.
Potential investors who are keen to build their personal wealth by investing in property tend to fall into 2 categories:
Currently renting and can’t afford to buy where they live
Rentvesting is a fairly new term coined to describe those investors who continue to rent the home they live in and purchase a property to invest elsewhere.
This particular strategy is very popular for those living in expensive areas such as Sydney’s Inner West who want to get onto the property ladder but simply can’t afford the price of property in that area.
Home owners with equity in their owner occupied property
Many home owners believe that because they already have what potentially could be a very large mortgage, that they can’t afford to purchase an investment property.
For some, that may indeed be true, but for those with substantial equity in their home, they may still be able to use that equity to fund the purchase of an investment.
Home buying costs
When buying a property, there are several upfront costs.
Some of which you’ll expect but especially for first time buyers, there are some costs you might not be aware of.
- Deposit for property (minimum 5 per cent)
- Pre-purchase inspections e.g. pest and building inspections, strata search
- Borrowing Costs e.g. loan application fee, valuations
- Government Charges e.g. stamp duty etc
- Conveyancer fees
- Home and contents insurance
- Additional life insurance, income protection fees & moving in costs
How to use equity to buy an investment property
Equity is the difference between the market value of your property and the amount you still owe against it.
For example, if your home is valued at $500,000 and you currently owe $300,000 on your home loan, your equity in that property would be $200,000.
If you then access $100,000 of that equity you will increase your borrowings against that property to $400,000.
Buying an investment property using SMSF
SMSFs are Self Managed Super Funds and they can be used to purchase an investment asset where the investor has insufficient financial resources to purchase a desired investment asset without borrowings.
This is a viable but highly complex option and must be discussed with your accountant or financial planner.
It is worth noting that:
The minimum amount required to open and SMSF is $200,000.
Should you use a mortgage broker?
A great mortgage broker will not only be skilled in finance but they will have access to many lenders and will understand their lending policies.
They may also have access to rates that you would not have access to.
A great broker will save you many hours, reduce your stress and ensure that your finance is structured correctly.
