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GETTING STARTED & YOUR LOAN SERVICEABILITY

To get started, you will need a deposit of between 5% – 20% depending on the lending institution.

If you draw equity against your principal place of residence which I see people do, I suggest that you take out what is called a “home equity loan,” a “line of credit loan” or an equity loan with an “offset account.” This type of lending allows investors to borrow against the equity in their property, and the investor has the choice to make withdrawals as they wish. Repayments are based on how much the borrower withdraws each month from the available balance. You are doing this for the purpose of purchasing an investment property so this equity loan is tax deductible. Do not do this by increasing your current home loan but only by obtaining  a separate loan such as an equity release loan. If you procured more equity by adding onto your home loan, then this would not be tax deductible.

However prior to doing anything, sit down with your accountant or qualified financial advisor and  work out the strategy that suits your circumstances and what your end goal is. For example, how many properties do you want, in what time frame and how much equity (available money) do you want to retire on? Ensure that you have pre approval before you start negotiating on any property, so you know what price range your next investment property will be in.

Critical to your strategy is your serviceability requirements. You must always carry out your due diligence. Crunch your numbers & be comfortable that you can make your loan repayments as well as meeting all of your monthly expenditures including having disposable income for yourself.

 

 

Loan serviceability is defined as your ability as a borrower, to service or meet loan repayments as calculated by the lending institution.

Financial lenders with regards to your serviceability capabilities, look at your “debt service ratio” which should not be more than 30%- 35% of your gross income. This ratio is your total monthly debt expenses compared to your gross monthly income. Current APRA requirements on Banks will also take into account other factors such as stress test requirements.

Meticulously go through the following scenarios:

  • After rental payments, how much money do I still need to put in to pay the loan repayment?
  • Can I afford a negative geared property (see below under “taxation” to read how negative gearing works). This means that the rent from that property does not cover the loan repayments and other expenses of the property (council rates, maintenance, land tax, water rates etc)

 Note: Negative gearing works for you  if the money you make from capital growth is greater than the loss you make in rental shortfall as well as being able to service the properties to the point where you can tap into the equity.

  • Can I still live the lifestyle that I want with the money left after my loan repayments?
  • Can I meet all my monthly living expenditures after my loan repayments?
  • If the property becomes vacant, how long can I financially survive paying full loan repayments? Can I survive for 3 months?

Note: Use at least 3 months as your benchmark

  • Can I afford to make maintenance repayments, such as a new oven, leaking showers, electrical faults, painting, new fencing, etc
  • In a strata complex, can I afford the strata payments, water rates & special strata levies if they come up on top of the loan repayments?
  • If I lose my job, can I still afford the loan repayments & if so, for how long?
  • If I need to employ an exit strategy, meaning if I need to sell the property as quickly as possible for whatever reason, is this property suitable for that?

Note: my property selections should all be able to sell quickly at market value due to their many positive attributes

Another factor to consider in your strategy is the type of serviceability you want with respect to capital growth of your property. For example, you may purchase 2 properties that are units which will have better rental yields & easier serviceability requirements than 1 property with a house on it. However the value of the capital growth on the house will likely be greater than the capital growth on the 2 units combined. Your strategy is about what suits your individual needs, your family’s needs & your short, to medium, to long term goals.

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