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How to know if you can afford to buy a property

How to know if you can afford to buy a property

Accumulating an investment portfolio is an effective way to start building wealth, but how do you know when you’re ready to buy your first property? Have you ever wondered, can I afford an investment property to begin with?

One thing is certain: the sooner you get into the game, the sooner you can start building your wealth.

Deciding whether you can afford to buy an investment property is a matter of becoming familiar with exactly how much it will cost, whether that’s something you’re prepared to commit to, and whether you will get approval from the bank. Once you’ve established your own priorities, ensured that you are physically able to afford a property and have your approval, you’ll know the time is right to start looking to buy!

First Step: Understand all the expenses

Before you know whether you can afford your own property, it’s integral that you know exactly how much it will cost. This is a matter of doing some research and becoming aware of all the potential expenses.

There is a list of standard costs, including bank fees, insurance and stamp duty. Then there are the costs that you might not have immediately thought of, such as maintenance fees, utility payments and council fees. Ensure you have a list that comprises every possible cost that will be asked of you so nothing remains hidden.

You should also have a good understanding of what kind of rent yield you can expect to earn. To do this, research into the areas where you can afford to buy and learn what the average rent is and what kind of tenants you can realistically expect.

To get an average figure of how much this whole process will cost you, deduct the rental income from the total sum of expenses (leave nothing out) per month. You should be left with a monthly cost, providing you attract a tenant every month. It’s also a good idea to calculate what the cost would be if you have a few months of vacancies, and whether you need to consider adding landlord’s insurance to your costs to cover this.

Next Step: Sort out your priorities 

Now you know how much buying a property is going to cost, it’s time to decide whether this works for you. To do this, you just need to get clear on your priorities and ask yourself a series of questions to determine whether this is the best way for you to spend your money at this point in your life.

Write down why you want to buy a property and whether doing so aligns with your long-term financial strategy. Consider whether you want a house or an apartment, and whether you plan to earn money from rent or whether you want to sell it after a few years’ appreciation. While you’re figuring out your exact plan, it’s a good idea to ask yourself what the interest rate on the home loan will be, and whether you are planning to renovate or bring in tenants instantly.

Consider the monthly figure you calculated, and what this means for your lifestyle. Will you be able to live comfortably while meeting these expenses? Will you have to make some sacrifices, and are you okay with that? You might find that there is an effective way of cutting down costs in other areas in order to fund this project, or you might find that there is something else demanding your financial attention right now, and property investment might need to wait a few years.

Get Approval

Once you’ve worked out what buying a property will cost you and established that this is the right choice for your life based on your current circumstances and long-term plan, it’s time to see whether the bank agrees with your choice.

To do this, simply make an appointment and ask. Being denied from one bank doesn’t mean you’ll be rejected again, and it’s a good idea to try smaller banks and credit unions when looking for a loan.

When it comes to deciding if you can afford a property, most of the work will be up to you. Before you ask anybody else, make sure you calculate your costs and potential inflow carefully, and are certain that this is the best option for you.