Can I afford an investment property?

The Can I Afford an Investment Property? Calculator provides an estimate of how much an investment property will cost.
It provides an estimate of the amount of cash you will require (or receive) on a monthly an 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.
Click Here for more information about the Can I Afford an Investment Property? Calculator.

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Loan term: 30 years

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

If someone is looking for an investment vehicle that is viable yet less prone to risks than other assets like stocks and managed funds, property could be a good choice. One of the most popular ways of investing, buying a house or a unit can be quite profitable – especially if the investor takes time and effort to learn and overcome the rigors of the property investment realm.

It is crucial, however, to understand that investing in property is not sure-fire way to earn and grow your net worth. As with any other investment, you have to make sure you fulfill your duty to manage your portfolio effectively to help you reach your financial goals.

Can I afford an investment property?

Affordability is at the top of the list of concerns a would-be property investor has. Can you afford an investment property?

To be successful in entering the property investment market, you need to have a vivid vision of your goals and a healthy financial capacity.

If you want to be a property investor, you have to make sure that you set your priorities right off the bat and create a rough sketch of your long-term financial strategy. 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?

Here at Your Mortgage, we want to make sure that you have the best tools to help you make plans for your future investment property. This “Can I afford An Investment Property?” Calculator will help you in assessing how much an investment property will cost by estimating how much you’ll need to pay monthly to cover the costs of your property investment and the yields you can expect.

For the calculator to work, it needs to know the property price, your loan amount, and the interest rate. You also have to indicate your expected rental income weekly and the annual rate of rental increases. Your annual salary and other taxable income are also essential parts of the equation.

For the expenses section, the calculator needs to know if you are going to pay for your home loan on an interest-only or principal and interest basis.

The following costs are also taken into consideration: council rates, strata fees, insurance, property manager fees, repairs and maintenance, land tax, and water rates. Inflation data is also necessary.

Take this one as a sample: suppose you are buying a $650,000 investment property in Sydney with a 20% deposit. With that down payment, you will only need to take out a $520,000 home loan. For this example, let us set the interest rate at 4% and the mortgage contract at 30 years. You will be paying on a principal and interest basis.

The average rent in Sydney is around $540; let us say you will charge your tenants $560 weekly, and you will increase rents by 3% annually.

For your salary, we will assume that you are earning more than an average Sydneysider - you take home around $150,000 annually, making it comfortable for you to invest in property.

For the property investment expenses, we’ll assume the following: Council rates - $1775; Insurance - $1,000; Repairs and maintenance costs - $1,500, Water rate - $650; no strata fees, property manager fees, and land tax. Inflation will be set at 1.98%.

Given these presets, the calculator will give you these results:

Disclaimer: It is important to understand this calculator, just like any other financial tools 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.
Year Year1 Year5 Year10 Year30
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

How much do you initially need for an investment property?

As a rule of thumb, you need to have in hand 20% of your target property's value for the deposit.

Having this amount of home loan deposit will enable you to comfortably borrow the remaining amount and enjoy better deals from lenders, whilst also helping you avoid paying the lenders' mortgage insurance.

To give you a rough breakdown of the initial costs you have to settle, take note of the median home values in the area where your target property currently sits and compute for the 20% deposit.

You also have to consider the taxes you have to pay - every state has its own sets of rules when it comes to property taxes. Talk to a local expert to get a sense of what the property investment climate is like in the area.

When is the right time to invest in property?

It is fundamental for property investors to understand the property cycle. Just like any other market segments, the property market is heavily influenced by several economic factors that contribute to the movement of the property cycle.

Many believe that it is best to take advantage of the market during the slump phase when values are falling. The main hurdle you have to overcome in this phase is the stricter lending rules, which can limit your financing options.

Other property investors, on the other hand, prefer to actively buying into the market during the upturn phase - this is when prices and rents start to climb up again 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.

Gain deep understanding of the property cycle by reading this guide.

Finding the best location to invest in property

One of the most critical considerations when buying an investment property is the location. Where your property is located can dictate how well your investment will perform.

In choosing the location, you have to consider the market you are trying to engage. For instance, if you are looking to rent out a house to professionals, choosing an area near or within a city-centre is the way to go. On the other hand, if you would like to target families, you may want to look beyond the metropolitan areas and look for properties in local suburbs.

Aside from determining your target market, you also need to assess the accessibility, infrastructure, nearby establishments, and environmental hazards of the area where you want to buy an investment property.

Flip-and-sell or rent - which one is better?

There are many ways to earn money in the property market. When you have a rental property, the most significant immediate advantage is the profit you make every month. Rental properties provide a steady stream of passive income that will help boost your budget.

Tax advantages are also one of the benefits of having a rental property. You may lose money on paper but actually make money overall, especially when your property is negatively geared and depreciation is factored in.

On the other hand, you may be able to earn quick cash when you flip properties, which is when you buy for a low price, add value through a cheap and swift cosmetic renovation, and sell for a profit.

If you decide to go this route, you would be spared from long-term headaches, especially if your turnover rates are fast. However, you do run the risk that you are unable to sell the property for a profit.

As a general rule, investors should treat the idea of flipping properties as a business, and managing rental properties as an investment strategy.

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

Investors will pay stamp duty when they purchase a property. There is also the annual land and capital gains tax. Check your state revenue office for more information about these levies.

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 settle when you have an investment property:

  1. Income Tax - You will have to pay tax on income that you receive from renting out your property. However, this one can be offset by interest repayments on your home loan as well as other deductions – so if the rent is less than your mortgage and associated expenses, no income tax will be due.
  2. Capital Gains Tax - You will only have to worry about this tax when you sell; it it payable on the profit or gain you make upon selling your investment property.
  3. Property Tax - More commonly known as council rates, this is a local tax that goes straight to the coffers of your local council, which funds community services and maintenance of public facilities. The amount of depends on your locality and the land value of your property.
  4. Land Tax - State and federal governments impose this tax, which is payable based on the combined unimproved value of the land you own. Land tax is typically calculated on what your land would be worth if it was vacant and applies at different rates in each state or territory.

To know more about how to manage relevant taxes, try 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, including advertising costs, bank fees, borrowing expenses, body corporate fees, council rate, insurance, land tax, property manager fees, surveyors' fees, repairs and maintenance, and water charges.
  2. Depreciation Allowances - You can claim depreciation on newly-purchased items such as appliances, blinds, carpets, furniture, and hot water systems.
  3. Negative Gearing - When the annual cost of your investment is greater than the return you are receiving, then 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.

Never hesitate to ask for an expert help

If you are just starting your property investment journey, it is best to seek help from professionals.

Well-timed and professional advice can help you out and save you a lot of money, especially in the planning stage.

While it is easy to understand the property investment market, investing in it remains a high-stakes game — one wrong move can make or break the success of your property investment. A financial adviser and a mortgage broker will be able to help you assess your plans and help you find ways to hit your investment goals.

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