Buying an investment property can be a powerful wealth-building strategy, but only if you go in with your eyes wide open. 

While property can generate long-term capital growth and rental income, it also comes with a range of financial responsibilities. 

Here’s how to determine whether you’re financially ready to invest.

Understand your borrowing capacity

The first step is knowing how much you can borrow. Your borrowing capacity depends on your income, expenses, existing debts, and credit history. A mortgage broker can assess your situation and give you a realistic picture of what lenders could approve. In addition to reviewing your current income and liabilities, your broker will consider whether you plan to use a cash deposit or equity from an existing property. 

They’ll also run different scenarios to ensure your investment loan remains serviceable even during vacancy periods or when rental income fluctuates. They’ll assess how much you can afford to spend on repairs or upgrades, and advise on whether an interest-only, fixed, or variable loan suits your strategy. Once your financial situation is clear, your broker can help you get pre-approved for an investment loan, giving you confidence when you start looking at properties.

Factor in upfront and ongoing costs

Investing in property isn’t just about mortgage repayments. There are significant upfront and ongoing costs to consider. These may include stamp duty, legal and conveyancing fees, loan setup fees, pest and building inspections, and possibly lenders mortgage insurance (LMI) if your deposit is under 20%. 

Once you own the property, regular costs can include council rates, water charges, strata or body corporate fees, property management fees, landlord insurance, maintenance, repairs, and land tax in some states. If your property is vacant, you’ll still need to cover these costs without rental income, so creating a buffer to cover at least three months of expenses is highly recommended.

Budget realistically for repairs and renovations

It’s easy to underestimate the cost of repairs or upgrades. Whether it’s cosmetic work to boost rental appeal or essential repairs like plumbing or roofing, costs can quickly add up. Always overestimate renovation expenses and build a contingency fund. Renovations can also add to your borrowing power if managed correctly. 

Your broker can help assess whether it’s worth refinancing or topping up your loan to cover improvements. Just be sure to weigh the expected rental return and potential capital growth against the upfront cost.

Understand rental income expectations

When lenders assess your loan application, they factor in projected rental income, but often only at 70 to 80 per cent of the estimated figure to account for vacancy and expenses. 

Check recent rental listings for similar properties in the area to get a realistic sense of income. Consider the suburb’s vacancy rate and how seasonal factors might impact demand. Some suburbs have high rental turnover or drop in popularity during certain times of the year.

Plan early

Working with a mortgage broker early in the process gives you clarity and confidence. The key is planning well, understanding your cash flow, and building a buffer for the unknowns.

Talk to a mortgage broker today to find out what’s possible for you.

Disclaimer: This is general information only and is subject to change at any given time. The content of this article is general in nature and is presented for informative purposes. Your complete financial situation will need to be assessed before acceptance of any proposal or product. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice.This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.