How much money do you need to have to become a real estate investor? It may be less than you think.
According to the Australian Taxation Office, 76 per cent of the nation's 1.7 million property investors earned less than $80,000 in 2009-10.
Most investors apply for a loan to finance their purchase.
Financial institutions look for evidence of a stable income, savings and assets to lend against (usually a deposit or another property with equity).
Gone are the days where you needed a 20 per cent deposit, but the more you have the better or you may be charged lenders mortgage insurance.
More investors are buying residential property through self-managed superannuation funds.
While this can be an effective strategy to increase your wealth in retirement, it's not without risk. Seek professional advice to ensure you invest correctly and do not breach the Superannuation Industry (Supervision) Act. Penalties for non compliance can be high.
There is more to financing a property investment than choosing the right finance product and structure.
You must be certain you can afford the acquisition expenses such as borrowing costs, stamp duty, pest and building inspection fees, and legal fees.
You also need to afford ongoing holding costs such as mortgage repayments, insurance, property management fees, maintenance and council rates, land tax and other government charges.
Depending on your personal financial situation, you may be able to negatively gear.
An investment is negatively geared when the costs you claim from it on your tax return exceed the income it produces.
Get professional financial, taxation and legal advice, and if you're going to pursue this strategy, get a tax-compliant depreciation schedule.
Property is a long-term investment, so make sure that if your circumstances change you can sustain it.
Will you be able to make repayments if your property becomes vacant, if the rent income declines or interest rates increase?
What will your exit strategy be if things go pear-shaped?
Don't just rely on being able to sell your property.
A good rule of thumb to estimate your staying power is to add 2 per cent to the current interest rate. If you can still afford it you should be OK.
Reproduced in full with permission.
News Limited Network Real estate investing not just for the super rich 18 February 2013
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