Seasoned property purchasers know that the total financial commitment made when acquiring residential real estate is not just the sale price written on the contract you sign.
In fact when you add on all the ‘extras’, such as stamp duty and legal fees, not to mention any improvement costs and expenses associated with establishing effective management of the property, you can end up paying significantly more than the contract price.
The key is to be prepared, know what to expect and plan and budget accordingly, because you don’t want to be dealing with potentially costly surprises on settlement day.
Having a well considered buying budget will also work in your favour when it comes to ticking the new serviceability boxes that most banks have implemented across the board for mortgage lending…an extremely important consideration for ALL property investors.
So here are five key steps to help you calculate and work to a buying budget.
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How much can you contribute to the deal?
What do you have by way of cash reserves, and things like equity, rental income, any lines of credit or the potential to raise funds through the liquidation of an existing asset?
This will influence how much you can ultimately borrow, based on your serviceability and also the amount of risk you’re prepared to accept, as reflected by the proposed loan to value ratio.
When reviewing how much you have at hand, it’s a good idea to consult an experienced mortgage broker who knows what constitutes ‘your contribution’ according to different lenders and their respective criteria.
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How much can you obtain from a lender?
Your borrowing power is essentially calculated by working back from the preceding question and accounting for additional elements according to the banks’ mortgage assessment measures.
How much a particular lender will approve is based on:
- How much you can contribute, including ongoing income from work and other sources, such as government pensions and other assets.
- Your credit history, which is why it’s essential to know whether yours is nice and clean or could use a bit of a tidy up.
- Your existing relationship (or lack thereof) with the lender in question and how well they know you.
Importantly, you should seek pre-approval, preferably with the assistance of someone with an insider perspective, who knows how to ‘put your best foot forward’ in terms of presenting as a client the bank would approve of, particularly in this new look lending landscape.
When you know how much you can borrow, you can shop with confidence in your buying budget, and that will make the world of difference when it comes to securing the best possible property for the best possible price.
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How much will the property actually cost you, including acquisition, improvement and management expenses?
So now you know how much you can spend. The next logical step is to determine what you can afford when it comes to acquiring a quality property investment.
Remember though, it’s not as simple as saying, I have $500,000 total in my own deposit and pre-approved credit limit so I can go out and buy a $500,000 house or apartment (or car park for some Sydneysiders).
You need to factor in extras such as stamp duty, legal fees and any costs that might come with a planned upgrade to the asset, such as minor renovations or refurbishments to make it more rentable.
Working to around 5 to 10 per cent of the purchase price will generally give you a good indication of how much more you’ll need to cough up at settlement.
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Shop within your budget parameters.
Whatever you do, don’t be tempted to ‘stretch yourself’ that little extra when it comes to shopping for the optimum investment property in your defined budget. The goal as an investor should be about saving money at time of purchase, not maxing out every last cent.
Now, more than ever, cash buffers must be maintained at very safe levels if you hope to build a successful long-term property portfolio. If you can save money on a deal and it still represents good buying, then why wouldn’t you?
Importantly, resist the urge to win a ‘bidding war’ in overly competitive markets, just for the sake of a notch on your investment ‘belt’.
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Does the property work to your numbers?
You’ve found the ideal property so now it’s time to do some calculations and determine whether your budget, including all costs, aligns with the proposed deal.
List all expenses to determine if you have sufficient cash deposits at hand to commence the transaction and assess whether your borrowing power will ensure you can complete the transaction over time.
Never submit an offer if it doesn’t meet your budget parameters. Always be prepared to walk away if the numbers don’t stack up.
If you would like inside insights into today’s changing lending landscape and how you can secure the necessary finance to successfully grow your property portfolio, why not speak with one of our experienced mortgage brokers?
We can guide you through shifting serviceability criteria and loan products and importantly, optimize your cashflow and finance structures to enhance your investment experience. Click here to connect with one of our friendly team today.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).