How much money do you really need to buy an investment property?

One of the best ways that Australians can move ahead financially is by investing in property.

With the benefits of negative gearing and capital gains tax concessions, buying an investment property can help you pay off your existing mortgage much quicker and have two holdings in assets.

For many, the question is centred around when to take the leap.

With this simple guide, you can get a rough idea on where you are at financially and how much you can spend on your investment property.

How much of a deposit should I save up?

This depends on how your desired property is going to cost you upon purchase. In most cases, you will need to save at least 20 percent of the overall value (which will also mean you don’t have to pay lenders mortgage insurance).

However, if the bank is confident in your ability to pay the loan without default, you can get away with as little as 5 percent of the property’s value, or 10 percent if it’s newly built.

Here are the figures you need to know:

Property value	5 percent deposit	10 per cent deposit	20 per cent deposit
$250,000	$12,500	$25,000	$50,000
$500,000	$25,000	$50,000	$100,000
$750,000	$37,500	$75,000	$150,000
$1 million	$50,000	$100,000	$200,000

Remember to take into account your stamp duty and legal fees as well. Add these to your deposit and you will have an idea on how much you will need to have saved to afford an investment property.

Should I use the equity in my existing property to buy a second home?

This is an option available to you. Instead of saving the deposit, you can use the value locked in your existing property as the down payment.

Here is how to figure out the equity in your home:

[Property value] – [Remaining mortgage debt] = [Equity]
For example: $500,000 – $300,000 = $200,000 equity

However, this doesn’t mean you will get that full equity value; it is just a guide. Your home will be revalued by the bank so it is important to know if it has gained value or lost value on the current market.

It is also crucial to remember that no lender is going to give out more than 80 percent of equity. Let’s take the same example and say the market has eased by about 5 percent (common in today’s market). That would mean the equity in a $500,000 home would be:

[Property value x .95] – [Remaining mortgage debt] = [Equity x 0.80]
For example: [$500,000 x 9.5 = 475,000] – $300,000 = [$175,000 x 0.80 = $140,000]

That final figure of $140,000 would represent how much your lender is likely to give you in equity. The more you borrow from that figure, the higher the repayments, actual and interest, are going to be.

You want to ensure that the rental returns for your investment property are at least enough to cover these extra payments to stay in the black.

Of course, this is just a basic guide and there are lots of mathematical permutations to consider. Contact Marc Woolfson to find out the best way to jump on board with an investment, without payments that are beyond your means.