Buying an investment property
If I had equity of 500,000 in my home (with a small mortgage left to pay) and wanted to buy a $450,000 investment property to rent out – please explain how that works when it comes to the repayments.
What would the “deposit” be calculated at?
I’m trying to figure out if the repayments (via rent) would be viable?
In: Mathematics
Assuming the NZ in your username is not a whim..
I’ll assume that the small mortgage is $50k, leaving you with $450k equity in your house. This is important in a moment.
Current RBNZ guidelines allow you to borrow up to 70% of the investment property price (30% “LVR” or Loan to Value Ratio) which is $315k. The idea is that you borrow the $315k against the investment property, and you borrow the shortfall ($135k) against your own home, often called “refinancing”. So you’re actually borrowing the full amount of the investment property, and securing it across two different properties via two different loans. The repayments would be around $2,625 per month based on a 7% interest rate, which would be offset by the rental income of say $1,730 ($400 a week) and then you need to allow for insurance, rates, repairs and maintenance etc.
The magic with property investing is that there would still be a fair amount of equity in your home, even after taking another $135k loan – about another $315k in this example. So you can do the same again to buy a 2nd and potentially even a 3rd investment property, assuming you can afford to pay the shortfall of about $900 per month per property.
Edit: you can borrow up to 80% of your personal home’s value ($400k) as the LVR for your residence is different to the LVR for investment properties. So you would still have the ability to borrow another $215k against your home for other purposes, not $315k. Apologies.
Investment properties typically only make sense if you can buy them below market value due to condition, fix them up a bit and either flip or rent out at a higher price than the mortgage.
In the US, a common strategy is to purchase homes that will be rented by tenants on government welfare, as the rent is backed by the govt and guaranteed at a certain rate. So someone will go in and buy very cheap properties, put a little bit of money into it, and then rent it out for 2-3x the mortgage value.
Another common strategy is to take an equity line of credit on your existing property – which is important because this can be used at any time for any purpose. Use that money to either entirely pay for or used as substantial down payment on a mortgage for a rental property. Once the property is acquired, rehabbed and ready for rent, you can refinance the new property, often times for a greater cash value than it was previously worth. Use the cash out portion to pay off the line of credit, and use whatever is left over as the down payment on the next property. Rinse and repeat to start your own little real estate empire.
Lastly, again in the US, when going for a mortgage on a property that has existing tenants, you can use the amount paid in rent every month to count as income when getting approval for a loan. This helps in scenarios where someone may not have a lot of cash on hand and aren’t already rich.
You take out a loan against the $500,000 of equity in your home. Now you owe the bank monthly payments to repay that loan.
If you just buy the $450k property outright, then…you just bought it outright. You own it now. There is no bank involved; there are no payments involved. You will still have to pay yearly property taxes on it.
If you take out a mortgage to buy the $450k property, then you’d also have monthly payments due to *that* bank for *that* mortgage.
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