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Colin Hill | 22 May 2018 | Property Investing

Buying an Investment Property: What Do You Need to Know

Colin Hill | 22 May 2018 | Property Investing

Buying an Investment Property: What Do You Need to Know

Buying an Investment Property: What Do You Need to Know

Many Kiwis see entering the investment game as a good way to build a little nest egg to secure their financial future. Investing in property is considered to be a relatively safe investment, as you’re purchasing a physical asset that can actively be managed and improved.

With increasing house values and the demand for the rental market at an all-time high, now is the time to investigate your investment opportunities. With a guaranteed regular source of income and the long-term increases in property value, this could be the perfect opportunity to capitalise on the current housing market.

Are you ready to enter the property game?

Whatever your position on the property ladder is, before taking that next step, you need to evaluate your current position to know what is financially viable. This will include knowing what assets you hold, household income and outgoings, and how much equity is tied up in your current property.

Before committing to building your investment portfolio, it’s important that you create a strategic plan. This should outline exactly what you want to generate from your new investments. What’s your desired return on investment? How much are you willing to spend? How much do you want to generate per week? These are all questions that you should ask yourself.

Talking to a trusted adviser at The Mortgage Supply Company will help you understand your prospects.

What is an LVR and how could it affect me?

When you are looking to get approval or pre-approval for your new investment property, lenders will want to understand what’s your Loan to Value Ratio (LVR). This is the percentage of your home loan against the property’s overall value. Lenders will use this evaluation to determine how much equity you have that can be used to purchase a second property. For example:

Deposit: $175,000

Property value: $500,000

Home loan of: $325,000

LVR: 65%

Using this amount, lenders are able to determine how much of a deposit they require from you. With lenders requiring a 35% deposit (or equity in other property) for investment properties, having a positive LVR will open up the options available to you. If you do not have the deposit required at the moment, get in touch and we will do all we can to help you with your investment.

What can I gain from an investment property?

Investing in a property shouldn’t be considered a short-term game. The fact is, in order to generate substantial returns on your investment portfolio it takes time and effort. The two major forms of return from the property are capital gains and rental income.

Capital gains are the profit generated as the property increases in value over time. Capital gain returns are caused by fluctuations in the housing market. Ideally, investors aim to purchase properties in areas that have a high market value or potential growth. But investors should be aware of the potential for market downturns as well, which may cause them to generate a negative capital gain.

Rental income is the revenue generated from rental payments. A common strategy amongst investors is to use the income received from tenants to pay off their home loan. Essentially, having the property paying for itself.

What are the potential risks associated with investing?

Entering the investment arena doesn’t come without risks and it is important you understand these risks before committing to your purchase. These may include:

If you finance the investment property with the same lender as your other properties, the lender has the right to foreclose both properties if needed. This may occur if you run into trouble with repayments against either mortgage. This may be caused by a sudden increase in interest rates or inability to fill your property, which may hinder your ability to maintain your repayments.

Secondly, playing the property market can be a dangerous game if you’re unfamiliar with how the market works. One month your properties could be valued at an all-time high. The next, the housing market could drop and they could be valued at a lesser amount than you paid for them. In this case, you may not be able to sell your properties at a value that allows you to pay off your existing mortgage.

 

At The Mortgage Supply Company, we can help first-time or seasoned investors understand potential investment opportunities and the risks involved. Property investment can be a great way to secure your family’s financial future if managed properly.

If you would like to receive some friendly free advice about investing in property contact us today to speak with myself or one of our experienced advisers.

 

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