Can I afford an investment property?

This calculator provides an estimate of how much an investment property will cost.

The calculator estimates the amount of cash you will require (or receive) on a monthly and annual basis to fund your investment property. It also gives an indication of the change in the amount of tax you will pay due to owning an investment property. These two measures are then combined to provide a measure of the after tax profit or loss associated with owning an investment property.

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Loan term: 30 years

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How to know when you can afford to buy an investment property

Investing in property is often seen as the ‘less risky’ form of investment, unlike stocks or managed funds that can require specialised knowledge to get a foot in the door. Purchasing a property, such as a house or unit, can be quite profitable - especially if the purchaser takes their time to learn about how to reap the most benefits from their new asset.

It sounds easy enough, but it’s important to understand that investing in property isn’t a guaranteed ticket to make money. As with any other investment, you should ensure you understand how to manage your portfolio effectively in order to reach your financial goals.

Can I afford an investment property?

Affordability is at the top of the list of concerns of a would-be property investor. The question of whether you can afford to invest is probably the biggest determining factor of whether you can enter the property market. Unlike other forms of investing, you need quite a large sum just to get into the market, which we will discuss later.

To be successful in entering the property investment market, it’s important to have clear goals and a healthy financial capacity to achieve said goals.

Setting your priorities straight right off the bat and creating a rough sketch of your long-term financial strategy can be a beneficial way to prepare to enter the property market. You can do this by yourself or by reaching out to a financial expert that can help you devise an investment strategy.

How does this calculator work?

At Your Mortgage, we want to make sure that you have the best tools available to make plans for your future.

This calculator can be used as a practical example of how much you can expect to pay to cover your mortgage, other related property expenses, and how much you will yield in return.

All you’ll need handy is the property price, the loan amount, the interest rate, your annual salary, and how much rent you will charge weekly.

Additionally, things like council rates, strata fees, insurance, repairs and maintenance, and more will be taken into account.

To illustrate exactly how it works, let’s use a hypothetical example. In this example, you have purchased a house for $650,000 in Sydney with a 20% deposit, meaning you have a $520,000 mortgage.

Paying 4% in principal and interest, you’ll charge the tenants in the property $560 per week, increasing by 3% annually. As a Sydneysider, let’s say you make $150,000 annually.

We’ll also account for the following expenses: council rates ($1,775); insurance ($1,000); repairs and maintenance ($1,500); water rates ($650). We’ll use the automated inflation rate of 1.98%.

Putting all of this information into the calculator would reveal the following results:

Year

Year 1

Year 5

Year 10

Year 30

Annual rental income

$29,120.00

$32,775.00

$37,995.00

$68,623.00

Annual repayments

$30,071.65

$30,071.65

$30,071.65

$30,071.65

Annual cash expenses

$4,425.00

$4,786.00

$5,279.00

$7,814.00

Cash Flow Before Tax

-$5,376.65

-$2,082.65

+$2,644.35

+$30,737.35

Tax Benefit

+$2,096.89

+$812.23

-$1,031.30

-$12,046.55

Cash Flow After Tax

-$3,279.76

-$1,270.42

+$1,613.05

+$18,690.79

Disclaimer: It is important to understand this calculator, just like any other financial tool available online, works only as a guide - the results obtained using these tools are just estimates. Please take note that this Can I Afford An Investment Property Calculator assumes that interest rates, taxes, fees, and other costs do not change over the life of the loan, which is quite unlikely in real life.

How much of a deposit do you need for an investment property?

As a general rule of thumb, you’ll need to put down a 20% deposit on an investment property.

This will help you avoid needing to pay lenders' mortgage insurance, and ensure that you’re comfortable borrowing and repaying the remaining amount.

For a rough estimate of what 20% might look like for you, have a look at similar properties to the one you are looking at buying and how much they sold for - this might be around what you would pay for a property.

You should also consider your state or territories relevant taxes. You might wish to talk to a local expert to get a sense of what the investment climate is like in the area.

When is the right time to invest in property?

It is fundamental to understand the property cycle as a property investor. Just like any other market, property is heavily influenced by several economic factors that contribute to its movement.

There is some debate about when is the best time to buy. Some experts believe it’s best to take advantage of the market during the ‘slump phase' when values are falling and properties are subsequently cheaper. However, in doing so, you’ll face one main hurdle, being the stricter lending rules. This can limit your finance options.

On the flip side, other property investors prefer to actively buy into the market during the ‘upturn phase’ - this is when prices and rents start to climb as demand intensifies. This can be a risky move, as you risk over-paying in a hot property market.

When the upturn phase reaches its peak, the property cycle moves to the ‘boom phase’, which lasts only for a short period of time. Competition in the market is intense during this phase, and properties are often sold for more than their original asking prices.

Finding the best location to invest in property

One of the most critical considerations when buying an investment property is the location. Where you purchase can dictate how well your investment performs, and it can influence the type of property you choose to invest in.

When choosing the location of your investment property, you should consider the audience you are trying to market towards. For instance, if you're looking to rent out a property to professionals, choosing an inner-city location might be the way to go. On the other hand, if you want to rent to a family, you may want to look beyond the metropolitan areas and search in local suburbs.

Other than your desired tenant, you should consider the accessibility, infrastructure, nearby establishments, and environmental hazards of the area you want to buy an investment. For example, is there any public transport nearby? This can be important if you’re looking to target city frequenters.

Flip-and-sell or rent: which option is better?

There are a few ways to earn money in the property market, but two popular ways are owning rental properties and flipping-and-selling properties. Having a rental property has the advantage of income from rent payments. Generally, rental properties provide owners with a steady stream of passive income, which can help boost the budget.

There are also some tax benefits of owning a rental property. You might lose money on paper, but make money overall, especially if your property is negatively geared, and depreciation is factored into the equation.

Another way you might be able to make a quick buck is what’s known as ‘flipping property’. This involves buying a house for a lower price and adding value through a cheap and swift cosmetic renovation, after which you sell for a profit.

Going down this route could spare you from long-term headaches, especially if turnover rates are fast. But there are risks involved, most notably, that there’s no guarantee that you’ll sell for a profit.

To think of it in simpler terms, investors should treat the idea of flipping properties like they would running a business, and having rental properties as more of an investment strategy.

How much tax do I have to pay on rental income?

Investors are required to pay stamp duty whenever they purchase a new property. Other tax to consider is annual land and capital gains taxes. These amounts can vary based on a few factors, particularly, based on the state or territory the property is in. To find out exactly how much each of these taxes will cost, check your state or territory’s revenue office.

How much tax you have to pay on your rental income depends on your circumstances.

Here are some of the taxes you will have to consider when you own an investment property:

1. Income Tax: You will need to pay tax on any rental income you earn. However, this can be offset by interest repayments on your home loan, as well as other deductions. So if the rental income is less than your mortgage and other associated expenses, no income tax will be payable.

2. Capital Gains Tax: You will only have to worry about this tax when you sell, but it’s payable on the profit you make when you sell your investment property. For example, if you purchased a property for $500,000 and you sell for $600,000, capital gains tax will apply to the $100,000 profit you made.

3. Property Tax: More commonly known as ‘council rates’, this cost is a local tax that goes straight to the local council. The amount you’ll need to pay depends on your locality and the property’s land value.

4. Land Tax: Both state and federal governments impose this tax. Land tax is calculated based on the combined, unimproved value of the land you own. It's typically based on what your land would be worth if it was vacant, and it applies at different rates in each state or territory.

To learn more about these taxes, check out Your Mortgage’s capital gains tax calculator and stamp duty calculator.

The good news is you are allowed to deduct certain property-related expenses from your tax.

Property investors can claim deductions for several expenses under three categories:

1. Acquisition and Maintenance Costs: These are the expenses against your rental income. A snapshot of these costs could include advertising costs, bank fees, borrowing expenses, body corporate fees, council rates, insurance, land tax, property management fees, surveyors' fees, repairs and maintenance costs, and water charges.

2. Depreciation Allowances: You can claim depreciation on newly-purchased items such as appliances, blinds, carpets, furniture, and hot water systems.

3Negative Gearing: When the annual cost of your investment is greater than the return you are receiving, your property is ‘negatively geared’. When this happens, the government will allow you to deduct the loss on your property from your gross income, reducing your tax liability.

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