How to know when you can afford to buy investment property

Investing in real estate is often considered the “less risky” form of investing, unlike stocks or managed funds which may require specialist knowledge to get a foot in the door. Buying a property, such as a house or a home, can be very profitable, especially if the buyer takes the time to learn how to get the most out of their new asset.

It sounds easy enough, but it’s important to understand that investing in real estate is not a guaranteed ticket to making money. As with any other investment, you need to make sure you understand how to effectively manage your portfolio in order to meet your financial goals.

Can I afford a real estate investment?

Affordability is at the top of the list of concerns for a potential real estate investor. The question of whether you can afford invest is probably the biggest determining factor in whether you can enter the real estate market. Unlike other forms of investing, you need a fairly large sum just to enter the market, which we’ll talk about later.

To successfully enter the real estate investment market, it is important to have clear goals and a healthy financial capacity to achieve those goals.

Setting your priorities early on and creating an outline of your long-term financial strategy can be a beneficial way to prepare yourself for entering the real estate market. You can do this on your own or by contacting a financial expert who can help you develop an investment strategy.

How does this calculator work?

At Your Mortgage, we want to make sure you have the best tools available to plan 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 real estate expenses, and how much you will get in return.

All you will need is the price of the property, the loan amount, the interest rate, your annual salary, and the amount of rent you will charge each week.

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

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

By paying 4% in principal and interest, you will be billing the tenants of the property $ 560 weekly, increasing by 3% per year. As Sydneysider, let’s say you do $ 150,000 per year.

We will also take into account the following expenses: council fees ($ 1,775); insurance ($ 1,000); repairs and maintenance ($ 1,500); water tariffs ($ 650). We will use the automated inflation rate of 1.98%.

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


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 taxes

– $ 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 that this calculator, like any other financial tool available online, is intended for guidance only – results obtained using these tools are only estimates. Please note that this investment property calculator can I afford an investment assumes that interest rates, taxes, fees and other costs do not change over the life of the loan which is quite unlikely in life real.

How much deposit do you need for an investment property?

Typically, you will need to make a 20% deposit on investment property.

This will help you avoid having to pay mortgage insurance from lenders and make sure you are comfortable borrowing and paying off the remaining amount.

For a rough estimate of what 20% might look like to you, take a look at properties similar to the one you plan to buy and how much they sold for – this could be what you would pay for a property.

You should also consider the relevant taxes in your state or territories. You may want to speak to a local expert to get a feel for the investment climate in the area.

When is the right time to invest in real estate?

Understanding the real estate cycle as a real estate investor is fundamental. Like any other market, real estate is heavily influenced by several economic factors that contribute to its movement.

There is a debate about the best time to buy. Some experts believe that it is best to take advantage of the market during the “downturn” when values ​​fall and properties are cheaper thereafter. However, in doing so, you will be faced with one main obstacle which is the stricter loan rules. This may limit your financing options.

On the other hand, other real estate investors prefer to actively buy in the market during the “recovery phase” – this is when prices and rents start to rise as demand increases. . This can be a risky decision, as you risk overpaying in a booming real estate market.

When the recovery phase reaches its peak, the real estate cycle moves into the “boom phase”, which only lasts a short time. Competition in the market is intense during this phase and properties are often sold for more than their initial asking price.

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

Investors are required to pay stamp duty every time they buy a new property. Other taxes to consider are annual property taxes and capital gains. These amounts may vary depending on a few factors, particularly depending on the state or territory in which the property is located. To find out exactly how much each of these taxes will cost, check with your state or territory’s revenue office.

The amount of tax you owe on your rental income depends on your situation.

Here are some of the taxes you will need to consider when owning investment property:

1. Income tax: You will have to pay taxes on any rental income you earn. However, this can be offset by interest payments on your home loan, as well as other deductions. Thus, if the rental income is lower 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 on the sale, but it is payable on the profit you make on the sale of your investment property. For example, if you bought a property for $ 500,000 and sell it for $ 600,000, capital gains tax will apply to the $ 100,000 of profit you made.

3. Property tax: More commonly known as the “communal rate”, this cost is a local tax which comes directly to the municipality. The amount you will need to pay depends on your location and the real estate value of the property.

4. Property tax: State and federal governments impose this tax. Property tax is calculated based on the combined, unimproved value of the land you own. It’s usually based on the value of your land if it was vacant, and it applies at different rates in each state or territory.

To learn more about these taxes, see Your mortgage capital gains tax calculator and stamp duty calculator.

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

Real estate investors can claim deductions for several expenses that fall into three categories:

1. Acquisition and maintenance costs: These are the expenses against your rental income. An overview of these costs could include advertising costs, bank charges, borrowing costs, corporate fees, municipal rates, insurance, property taxes, property management fees, surveyor fees. , repair and maintenance costs and water costs.

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

3. Negative gear: When the annual cost of your investment is greater than the return you receive, your property is “negatively oriented”. When this happens, the government will allow you to deduct the loss on your property from your gross income, thus reducing your tax liability.