As much as you will generate an income from your investment property, in the first few years your costs will often outweigh the income generated. As an investor, you would be relying on capital growth to make up the difference, but as the capital growth is tied up in the property itself, you won’t be able to physically access it. Therefore, you will need to be contributing from your own cash flow to ensure the costs of holding the investment are met, even while the income (rent) being paid is insufficient by itself. Therefore, if your expenditure is already similar to your income, you may want to consider how you will fund your investment during the stages.
We can source the right investment loan to suit your investment objectives. From ascertaining your borrowing potential for any given investment to securing the finance and then to settling on your next investment venture, we are there to assist you in your wealth creation endeavours.
applying for an investment loan
Applying for an investment loan, in principle, is not really different to applying for a loan to buy a home for yourself. The 5 C’s all still apply. The same financial information needs to be provided. The same credit history will be checked.
However, one key difference is that your serviceability calculations will change, and they are often more favourable. This happens because you will be able to include most of the expected rental income as part of your income, and your interest costs in having the loan will be assessed as being tax deductible.
Here are some steps to investing and assessing whether applying for an investment loan is right for you.
is an investment loan right for you?
Nailing down the right loan is important, but as with any property purchase, you should always have pre-approval before entering into a contract. In addition, your serviceability may depend on a valuation of the property and its likely rental income, which isn’t typically known until after you have signed a contract. By getting pre-approval and entering into the contract subject to a ‘Finance Approval’ clause, you can avoid losing your deposit money should the valuer’s assessment of rental potential significantly differ form yours.
How will your repayments look after a few interest rate rises? Will your rent be able to be increased in line with your additional costs? How about if property prices fall? What happens if your tenants damage the home? What about if they skip out of their obligations? These are all risks (among many) that must be considered in advance. The investor should then be comfortable that over the long term the return on their investment is worthwhile given the associated risks in investing.
While the bank may have agreed that you can buy a $500,000 property, it doesn’t necessarily follow that every $500,000 property will be an outstanding investment. Research where you are buying, make sure you understand what and why you are buying, and make sure that you are comfortable that you are paying the right amount. Be prepared to walk away if the investment isn’t stacking up. Unlike buying a home to live in, this is a purchase that should be made in a completely emotionless state and treated purely as a business transaction.