How much do you need to invest in an investment property?
Property investment is probably the most common form of long-term wealth creation.
We find there are so many people who would like to invest in property but have no idea just how easy it is on your back pocket. We’ve read many articles with the title “ What will an investment property cost you?” ; “How much money do you need to invest in property” ;“The cost of investing in property”; “How Much do you need to get started in property investment?” … and at the end of the article you are as confused as you were at the beginning. So, before further explanation, let’s give you the answer up front then some explanation.
For most people reading this article you need exactly $0. So is this affordable for you now?
The reason the figure is $0 is because, with most clients, they are buying their first property investment after they have built up some equity in their own home. Lenders are therefore prepared to lend you the full amount of purchase, plus stamp duty plus legal fees so the actual amount of cash you require is approximately $0.00!
“But I don’t have an existing property!” … then again, the amount you may need is still $0.00.
This would assume that you have parents who are willing to give you a lot of trust – not cash, just a lot of trust. Many lending institutions today will take a guarantee against a home owned by a very good friend or family member. Basically, you are receiving nothing but absolute trust from the guarantor(s) that you will not default on the loan. This is the only time that the guarantor’s property will be placed at risk. So if you are confident in a secure job and a reasonable income, then using a family guarantor is an easy way forward. Speak to your local broker or Bank about this type of loan.
“I have no-one to help me, I’m on my own and I don’t have any current property or property investment”
In this case, you will require some funds. There is no one answer on how much money you will need to start investing in property. The amount required will depend on a few factors, some discussed further below, but as a summary the minimum you will require will be:-
- 95% of the purchase price of the property
- Stamp duty payable on the property
- Legal costs in purchasing the property
- Mortgage insurance – (This in some cases can be loaned (capitalized) against the property loan but almost certainly there will still be some cash cost)
** Let’s say it is a $450,000 property investment. You would require:-
Minimum 5% deposit – $22,500
Stamp duty – $6000 (this would ONLY be for a new house and land, for an apartment or townhouse it would probably be around $14,000)
Legal Cost – around $2000
Mortgage insurance – allow $11,000
** All costs are indicative for this exercise only
So how much do you need to get started? Probably around $45,000 to purchase a property valued at around $450,000. This figure is indicative only and should all be checked by your Broker and/or accountant.
Costs can vary considerably between houses and units, and regional and city-based locations. The location and type of property you are targeting can affect these figures even on a timing basis. For example, a lender may request a minimum 20% deposit in an area like inner Sydney in 2016 where there may be greater risk in apartments due to a possible over-supply.
Your investment strategy may also impact on how much you need to spend on your investment property. It’s important to remember that a very high rental and/or a low entry cost doesn’t necessarily mean the property investment will give significant future growth.
Most Lime property investors choose to purchase a slightly more expensive property a ‘blue-chip’ suburb, usually in close proximity to the CBD of one of our major capital cities and utilise negative gearing to keep cash-flow very manageable and increase the probability significant capital growth.
For some investors who place high value on cash flow, a lower-cost property with a high rental yield may be an ideal investment although in doing this, capital growth potential is often much less.
All investors need to conduct thorough research into the investment property they are planning to purchase. Lime Property Solutions makes this easy but completing the due diligence for you to ensure the property investment stacks up, minimising your risk and maximising the capital growth potential while looking after the cash-flow of your investment dollars.
Important Notes on this information
Deposit costs can vary enormously. The deposit is the amount of money you must ‘deposit” at the start of the purchase in order to secure the property and full future financing. Deposits are almost always calculated as a percentage of the purchase cost. Usually, a 10% deposit is required by the vendor but 20% of the purchase cost may be stipulated, (normally by the lender!). Some lenders might even be higher depending on the timing and location or even based on the purchaser’s borrowing profiles. Lending guidelines are dynamic, for example, in 2015 The Australian Prudential Regulation Authority lending guidelines led to many lenders requesting a lower loan-to-value ratio (LVR) on prospective purchases, putting the onus on investors to come up with higher deposits. LVR is calculated by dividing the amount borrowed against the value of the property then multiplying by 100 to get a percentage.
For example, a $500,000 value home with $300,000 owing would be $300K/$500K x 100 = 60% LVR.
Note if you wished to purchase an investment property of around $450,000 and you already own a $500K home with a $300K mortgage then your borrowing LVR would be:-
Home Value $500K=$450K = $950K Loan Mount $300K + $460K (allowing for borrowing of stamp duty and legal costs) = $760K so LVR = 770/950 x 100 = 80%. At 80% LVR there would normally be no mortgage insurance to pay.
Lenders will often require investors with a lower deposit (almost always 20%) to pay for lender’s mortgage insurance (LMI). This is a type of insurance that protects the lender (not the borrower) if the borrower defaults on their mortgage. Mortgage Insurance is a one-off payment but it can often be capitalised (added on to) the ongoing repayments on the investment loan making very little difference to the over-all cash flow. Normally a mortgage insurance premium to pay should not be seen as any ‘game-changer’ in purchasing a property investment.
All property investors are required to pay stamp duty on their property purchase. The amount of stamp duty varies by state and property value. Buying a new house and land property investment can lower this cost substantially as you are only required to pay stamp duty on the value of the land.
Property investors will also have to pay legal costs or conveyancing fees to their legal representative looking after the purchase of the property plus any title searches the legal person has to pay on the property.
