Check your cash flow before investing
Investors thinking about taking advantage of low interest rates and solid rental returns should assess the cash flow of potential property investments before jumping into the market, Smartline managing director Chris Acret says.
It's relatively simple to assess the shortfall between the cost to fund an investment property and its earning potential, to gauge the impact on an investor's cash flow, Acret says.
He cites the example of a recent Smartline client who had a home valued at $850,000 on which he owed $200,000. He sought advice as to how he might use the equity in his home to invest with minimal impact on his lifestyle.
"We ran a simulation based on his desire to purchase two properties at around $400,000 each," Acret explains.
"He wanted to avoid paying lenders mortgage insurance (LMI), which kicks in if you borrow more than 80 per cent of the value of the property. We estimated, after allowing for his current debt, he had access to approximately $480,000 to invest in other properties and would only need to use about $200,000 of these available funds."
"Like most investors, he wanted to gear the purchase as much as possible to minimise the use of equity from his home. As a result, he is looking at borrowing 80 per cent of the value of the two new properties and taking the remaining 20 per cent plus costs, such as stamp duty and other government fees as well as solicitor costs, from the equity in his home."
"With average rental returns in his suburb of interest sitting at 4.5 per cent, which will earn about $18,000 per annum per property, and basic variable interest rates sitting at around 5.2 per cent, which would cost approximately $21,000 in interest, he would only need to make up a shortfall of $3000 per annum on each property."
"However, there are additional costs to consider, such as council rates and repairs, but this can be further reduced by the tax deductions available to investors. This particular client's overall out of pocket expenses will be approximately $230 per week for both properties."
