How do you buy your first investment property?

There are 2 ways you can go about doing this.

1. Save a deposit

If you currently don’t own a property, you can save a deposit and purchase an investment property before you purchase your own home.  Preferably live somewhere cheap (e.g. at home with your parents, or with flatmates), and use the rental income from the property, along with some of your wages, to pay down the loan and create equity.

The advantage of buying an investment property before you buy your own home is that it gets you onto the property ladder by enabling you to buy a cheaper property, such as one in an outer suburb, a unit, or a house on a cross-leased section.

There is nothing wrong with starting on the bottom rung of the property ladder, but when people are buying a home to live in, they tend to have a long list of requirements.  If you intend to live in the house, then you need it to be a sensible commute from your workplace, possibly in the right school zone, most likely you’ll want a yard, a garage etc.  If the property is to be an investment, then you just need to find something that someone will rent from you.  The property no longer needs to suit your particular requirements, and you have more opportunity to find something that you’re happy purchasing.

2. Use your equity as a deposit

If you already own the home that you live in, then you most likely have some equity in your property. Rather than leaving this equity sitting idle, you could consider using this as a deposit for an investment property. In my previous post, I explained that equity is the difference between the value of your house, and the amount you owe the bank.

For example..

if your house is worth $400,000, and you owe $280,000, then you have $120,000 equity.

In banking terms.. 280,000 / 400,000 = 0.70, so your Loan to Value Ratio (LVR) is 70%

Banks will generally be fairly happy (at present) to lend you up to 85% without imposing a higher interest rate.

So, assuming the above example, you would have enough equity to purchase an additional $400,000 property.

Current loan $280,000 + new loan $400,000 = $680,000

Current house $400,000 + new house $400,000 = $800,000

Total loan $680,000 / Total value $800,000 = 0.85 or 85% LVR

Be aware though, that you will need to ensure the rental income from your investment property will cover the loan costs.  I DO NOT encourage people to purchase negatively-geared rental property!

Keep an eye out for a future post on analysing a potential investment property.






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