The one thing that stops most people in their tracks when it comes to property is a lack of borrowing capacity.
Effectively, your borrowing capacity is how much spare cash you have left over when you factor in all your income and subtract your expenses.
For most people, the income side of the equation is relatively fixed. If you earn a wage, that will be your primary source of income. Of course, there are other ways to earn money, but for most people, they rely on a single income source.
On the expense side, however, things can change dramatically.
If you have other forms of debt, like personal loans or car loans, your borrowing capacity can quickly diminish.
Even though a car loan, for example, might only last a few years, the total repayments can be significant. If you’re paying off $1000 per month or more on a car loan, that’s money that could potentially be better invested in assets that appreciate in value.
The second part of the borrowing equation is whether you are buying a home to live in or an investment property.
Again, all things being equal, you will typically be able to borrow more when you invest. That’s because you can factor in the rental income when purchasing a property.
One of the advantages lenders offer is including rental income when calculating your serviceability. The higher the rent, the more you can theoretically borrow.
However, it’s important to note that lenders won’t include all of the rental income, typically accounting for between 60% to 80%.
This means that, for the most part, you can access more money when you invest in property compared to purchasing a home to live in.
When you are buying a PPOR, you are essentially required to make mortgage repayments from your own income after tax, which can significantly reduce your borrowing ability.
Investors also have access to interest-only loans, which are not always available to owner-occupiers. These loans have lower overall repayments because you’re only paying interest, thereby increasing your borrowing capacity.
However, there is one caveat to mention. If you’re paying a high rent, this can limit how much you can borrow for investment purposes.
I’ve always advocated for reinvesting because it allows you to enjoy a great lifestyle without the high mortgage repayments coming out of your own pocket.
That said, if your goal is to build a property portfolio, it’s crucial to ensure you’re not overspending on rent. A reputable buyers agent will assess your entire financial situation and make recommendations for property investments that are tailored to your needs.
Being able to borrow and access high leverage available in real estate is why property investing can be so powerful.
Finance is a game in itself, and mastering this aspect opens up numerous opportunities to build a substantial portfolio.
Receive up-to-date financial advice, backed by property market insights from a Henderson buyers agent today and unlock your real estate goals sooner.
