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.
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