Put Your Property To Work
You can enjoy another perk from property investment by making good use of your residential property’s equity. This is the difference between the value of your property and what you owe. Let’s say your property is valued at $500,000 and you have $200,000 left to fully pay the property. Then your equity value is at $300,000. Lenders will allow you to borrow against the $300,000 to manage your funds, invest, renovate or even refinance your mortgage.
Homeowners may refinance their existing property at the current higher value without having to sell the property. You can use this option instead of waiting for years to save up for a deposit. It will allow you an opportunity to capitalize on the current market value of the intended property. It must be taken into account that using equity means your mortgage payments will increase. Also, that the interest for the new loan will be paid at your mortgage rate. You have to seek for professional advice which is highly encouraged.
Managing Your Commitments
You have to review your debt profile. This is composed of your credit card balances, store cards, purchases and the like. These types of debt rack up high-interest rates significantly affecting your cash flow.
Your borrowing capacity could be greatly affected by how much you owe in unsecured debt. This often causes investors to hold back their plans in growing their portfolio. Lenders also evaluate the “serviceability” of a loan applicant based on their paying capability.
It maybe that a good portion of your monthly income goes to high-interest payments. If this is the case, it could limit the amount of money that you may be able to acquire property. Your debt can be reduced by controlling your spending as much as possible. This is to help pay off your debt or at the very least improve your standard of living.
Previous Article: Understanding the Market and your Tax Position
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How’s The Market?
– The prices of properties in your chosen locality
– Availability of properties
– Average asking price.
What’s Your Tax Position?
As a safe and reliable investment, property investment could help you improve your overall tax position.
Investors’ ability to borrow is a considerable portion of the property value. They also enjoy tax benefits based on the financing structure of their property. The type of property and estimated income affects this as well. The owner is taxed on the income if the investment returns a profit. If a loss is declared over the fiscal year, the owner could reduce the taxes he pays through offsetting the loss on other income.
Interests that you can offset against the income from the rental income:
- – Interest charged on depreciation
- – Insurance
- – Investment loan
- – Overheads or other similar costs
When an investment property incurs a net loss and this is offset against the income, this is referred to as ‘negative gearing’. Investors must be well aware of negatively geared properties due to the size of their deposit. Still, others opt to manage their properties on a loss for tax purposes.
Another to consider is investment properties, when sold for a profit, will sustain Capital Gains Tax (CGT). You should take a note of this when evaluating your property investment plan. As well as the potential profit from a property sale.
It is important to ask for an accountant or a qualified tax adviser’s opinion before venturing into property investment.
Previous Article: What’s Your Buying Strategy?
Next on the blog: Finance Options and Management
Now that you’ve set your financial goals, have decided your investment strategy, and received your pre-approval from a lender, where do you go from here?
Another important factor you have to establish is your buying strategy. If only for the purpose of avoiding investing into a property that is not only to your liking but also not fit to your investment plans.
In your search for the property of your choice, you must first consider if you’re looking to buy a low maintenance investment or a fixer-upper.
There are both potential value and drawbacks in purchasing a property in need of renovation. The cost and management of which could prove to be difficult if you’re not much of a hands-on-person, requiring you to bring in additional manpower to do the work. On the other hand, new and pristine properties are still high-priced even if they have the tendency to rent instantly.
The location of your prospective investment is another important factor to consider. There is noteworthy market price differences in property in varying states. Some investors are attracted to investment opportunities outside their own locale. For instance, A Victorian 3-bedroom house may cost half as much as a similar residence in Sydney.
Investors on a restricted budget may consider hunting properties in cheaper areas. The only risk is that you may need to rely on agents you have never met before and on a property manager to take care of landlord duties.
After geography, the next thing you have to consider is what type of property you want to have. Generally, land value increases the closer it is to the city. This could mean that investors would prefer for a unit than a land with improvements. Recently, units have become the prudent choice for Australians who wish to live close to the city. This means that rental returns as well as capital growth are looking positive.
What’s important in property investment is you do your homework and review the location carefully. Consider proximity to schools, shops and other amenities which increases its appeal to potential tenants or buyers.
To maximize their success in property investment, investors must analyze first and foremost their financial position and borrowing capacity. You need to already establish your financial goal. The natural next step is to determine what kind of financing is needed to facilitate the purchase of the property of your choice. Financing of course refers to your borrowing capacity. Therefore your payment capabilities as taking on debt greatly influences your investment strategy timetable.
For first home buyers, farm buyers and vacant land owners, they are entitled to some tax exemptions. They should check with the local revenue office of these entitlements which is a factor for your borrowing capacity. Residential property asset is an alluring investment indeed. It allows the investor to borrow a significant amount to fund the purchase.
Property prices usually ranging in the hundreds of thousands of dollars. Property purchase might prove to be a daunting task for most of us. Due to it being a stable investment, financial institutions are quite lenient and flexible to granting home loans of up to 80% of the market value price.
The first thing to consider among your financing options is to hire a mortgage broker. They can assist you in evaluating how much should be borrowed for the purchase after selecting the mortgage. This is of vital importance since mortgage brokers can help you determine how much you can afford to borrow and not go beyond that.
Due diligence dictates that consulting an accountant prior to any loan applications is necessary. There are also other factors you need to consider. Such as tapping into a home equity loan if you are already a current home owner especially when your property’s value has already appreciated considerably. That equity could be used as a down payment for a new investment.
But if you are a first time investor, the usual stumbling block is coming up with the deposit.
It is still possible to borrow a large amount of the purchase price. However, you may need to be in possession of some savings. If this is the case, the good news is that Lenders Mortgage Insurance (LMI) allows you to borrow up to 95% of the market value of the property. LMI protects lenders against losses in case a borrower defaults on a home loan. If it is necessary for the security deposit to be sold after the default and the sale price will not cover the unpaid balance of the loan. The lender may apply for an insurance claim for the reimbursement of the loss. The cost of LMI might be a little steep but borrowers may include it in the amount to be borrowed, in effect lessening costs for the buyer.
Another option for first time buyers is the use of a guarantor to back up the loan. Essentially, the guarantor partly shoulders the responsibility of the purchase. Usually by providing a deposit for first time buyers who have sufficient funding for a loan but not enough for a deposit. Both the borrower and the guarantor must have a full grasp of their responsibilities before engaging in any commitment.
Ultimately, what determines how much funding you should borrow is your capacity to pay monthly on your mortgage.
This is what greatly influences the lender’s evaluation of your loan application. Lenders would inform you of your maximum borrowing capacity. But you must be aware of the actual amount you’re comfortable with.
The first step is to analyze how much disposable income you can afford on a monthly basis. There might be a difference between your net rent income from your property and the amount you need for your monthly mortgage. Thereafter, you should discuss this with your broker of choice. This is to design a strategy for you based on your estimates. Offers from different lenders against your financial goals and lifestyle choices to give you an overall idea how much you can afford to borrow.