The property hunt can be a very exciting time for many people. It's a time full of excitement, nerves, and hope.
However, for some people, this can be a draining experience because there are so many options out there and it's hard to know what the best option is for you.
Having a firm understanding of your budget allows you to streamline your search for your next property without the hassle of wasting your time on properties that fall outside what you can afford.
Going to a bank/broker to get a pre-approval is the best way of knowing exactly how much lending you can get, but this isn't practical if you just want to get a quick assessment done because the turnaround time at the bank can be upwards of 10-working days.
So, to get a quick assessment of your budget, you have to crunch some numbers...
Bank lending policy is always changing and how they assess your income etc. has a huge impact on your affordability. In saying that, with the current implementation of debt-to-income ratios, we can gauge roughly how the banks will assess your financials.
The formula is simple
((Income + Proposed Rental Income) x DTI) - Existing Mortgage = Estimated Budget
To calculate your budget, all you need to know is the figures above. To further clarify what they all mean, here's some more information:
- "Income" is the annual gross household income of the investor(s)
- "Proposed Rental Income" is the rental income you expect to receive once you tenant the new property
- "DTI" is the imposed debt-to-income ratio
- "Existing Mortgage" is the mortgage you currently have outstanding (if any)
Let's work out the budget of a homeowner looking to buy their first investment property. Here are the assumptions:
Household gross annual income of $160,000
The proposed rental income is $25,000 per year
A debt-to-income ratio of 6 is imposed
They have a $400,000 existing mortgage
In this case, the buying power for this investor is approximately $710,000
How did we get to this figure?
((160,000 + 25,000) x 6) - 400,000 = $710,000
When the time comes to secure lending you will need to input your numbers into a bank servicing calculator and depending on the level of expenditure you have, outstanding personal loans, children, number of vehicles, etc., your specific budget figure will change, but the result should be a number that is ballpark to what you calculated.
Remember, the best investment is the one you can get lending for.
Investors who are aware of this and aim within their means are the ones who are able to capitalize on the best opportunities as they appear because they have set themselves a target and can jump on anything within that bracket.
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