This lesson is about the FINANCE aspect of investing in property.
Being a ‘large ticket item’ , investment in property is normally going to require funding from a financial institution for at least part of the purchase price. There are a number of important concepts to understand in this area.
The cost and availability of credit varies from time to time depending on prevailing national and global economic conditions, the macroeconomic management agenda of government and the directives from prudential regulators.
Interest rates, valuations, Loan to Value Ratios and the finance repayment requirements (interest only vs P&I) will all be influenced by the financial climate at the time.
The power of leverage is one of the attractions of property investment. Given that it is a ‘bricks and mortar’, real asset, lenders are prepared to finance a very large proportion of the purchase with only a 20%, 10% 5% or even a 0% (in the case of the buyer having sufficient equity in other property) deposit. This is the power of leverage- making your money work for you! It allows investors to own significantly larger assets than their immediate access to funds alone would allow.
We then look at the concept of equity and how the lenders calculate ‘available equity’.If you have built equity through gains in property values over time or by reducing the outstanding debt then you will have built equity in the property. You can then use this equity to invest.
If you are investing with another person then the ownership split needs to be decided. The proportion of ownership can be adjusted to maximise the available tax rebates and or to minimize the likely capital gains tax payable in the future and sometimes lenders will mandate who has to be on the contract.
Cash depositors face challenges. They are an unknown and untested entity for the lender and so are subject to intensified scrutiny by credit assessors as they carry a higher risk than those who have borrowed before, repaid faithfully and built equity.
BUT everyone has to start somewhere!
Profit is the return to risk but it is also the return to effort.
Getting in to shape ahead of time and being ‘finance ready’ will help you to jump the hurdles more easily.