How regulators ruined my dream of real estate investing (but it’s okay!)
On the plus side, all of the other borrowers that I now meet in real estate auctions will also be constrained in the same way, so I hope I don’t outbid that much.
It is estimated that moving reduces a person’s maximum borrowing power by about 5%.
Prior to Wednesday’s announcement, I had calculated some rough numbers with my current lender, who indicated that in addition to my existing mortgage of $ 710,000, I could possibly borrow in the region of $ 530,000 for a investment property. This represents a total potential borrowing authority of $ 1,240,000.
So at 5%, the reduction takes away $ 62,000 from my total borrowing power. Since I can’t instantly pay off my mortgage, it comes from the investment loan – more than a 10 percent drop in my borrowing power to invest.
Considering the extra money I was willing to put up, that probably lowers the price of my Ultimate Maximum Real Estate Offer from $ 550,000 to over $ 480,000.
So I had to review my investment plan of attack.
Previously I was looking to buy a two bedroom unit in central Canberra. The city has decent rental yields of around 5 percent, but potential capital growth is somewhat constrained by the plentiful supply of new land – both infill and on the outskirts of the suburbs.
But I had figured that if the capital growth didn’t pay off, I would just take advantage of the rental income, tax deductions, and if things really went wrong, I could sell my current home and move to Canberra for retirement.
The idea of spending my years at sunset reading books in the sunny National Gallery of Australia Members Lounge, overlooking Lake George, actually brings me great pleasure (it’s beautiful, visit when you can).
However, as I watched them over the past few months, the prices inside Canberra were already eluding me, and the new squeeze on borrowing makes it even less likely that I can afford to buy something there.
I can certainly still invest. It will just have to be something cheaper and more distant. And having grown up in the suburbs of the national capital, I don’t know if I am like want to retire there. It’s time to broaden the search!
So I requested a new loan application form from my bank, and I’m about to fill it out.
As always, I’m immediately stuck on when they ask you to estimate your monthly living expenses.
Luckily, I’m about to take four weeks of annual leave to finish a book I’ve written on the same subject! It’s a step-by-step guide to help you consider all the possible expenses you might encounter in life, find savings at every turn, and ultimately come up with a realistic estimate of your monthly living expenses.
Knowing this number is crucial for several reasons. For one thing, as I have discovered, it is always the first thing lenders ask you when you want to borrow money. They (and you!) Need to know you can afford the refunds. Having a good understanding of your living expenses can help you get the most from them.
It will also help you decide how much to save for emergencies. Most finance gurus recommend having between 3 and 6 months of living expenses sitting in an easily accessible emergency fund.
Knowing your monthly living expenses is also key to knowing how much to save in anticipation of retirement.
So, I bust the property by investing on ice for about a month, while I find out about it all. You can read it all when I’m done!
- The advice given in this article is general in nature and is not intended to influence readers’ decisions regarding investments or financial products. They should always seek their own professional advice that takes their personal circumstances into account before making any financial decisions.