Do you want to invest in real estate in Austin, TX? Before jumping into the process, ask yourself this question: Can I afford an investment property? To determine if you can afford a property in the Austin area, answer the following questions as honestly as you can:
What Deposit Do You Need to Afford the Investment Property?
As a general rule of thumb, most lenders require a deposit of five to 10 percent of the investment properties selling price.
Let’s take an example: say your lender will accept a five percent deposit on an investment property and you can save, or have already saved $10,000. By working backward, you can afford a $200,000 ($10,000/5 x 100) home. Use this formula to determine the deposit and investment property price range you can afford.
What is Your Cash Flow? And, How Much Can You Afford to Save?
Next, determine your available cash flow and how much you can afford to save every month. In order words, what are your expenses? And, what is your current income? To determine how much you can afford on an investment property, do the math. Here is the equation:
Income – Expenses = Potential Savings
For example, your income each month is $2,500 and your expenses are around $1,500: income ($2,500) – expenses ($1,500) = $1,000 in potential savings. Say you can afford to put $1,000 into your savings account every month. It will take you 10 months to save up for a $10,000 deposit.
In addition to saving up for the deposit, it is also important to determine what size loan you can afford to pay. How do you know what size loan you can afford? Your lender will determine this number by calculating your debt-to-income ratio. The debt-to-income ratio is usually somewhere around 28 percent, depending on your credit score, debts, and financial history. If your lender determines your debt-to-income ratio as 28 percent, that means the bank will give you a mortgage where the repayments cost 28 percent of your monthly income.
Here’s an example to help you determine your monthly mortgage (at a debt-to-income ratio of 28 percent):
Income ($2,500) x Debt-To-Income Ratio (28 percent) = A $700 Monthly Mortgage
With a $700 monthly mortgage on an interest only loan at six percent, you can afford to borrow $140,000.
Can You Cut Expenses to Generate More Cash Flow?
Unless you are already counting pennies, there are usually ways to cut down on costs. Here are a few tips to help you increase your cash flow each month:
- Cut back on extras
- Use coupons for groceries and other expenses
- Join a carpool to save on commuting and gas expenses
- Cancel the gym subscription you hardly use
- Avoid using credit cards on your purchases
- Using credit cards can make it harder to keep track of your expenses – unless you keep a detailed spreadsheet containing every single purchase.
- Consolidate existing loans into one loan with lower interest
- Minimize dual and unpaid services (i.e. magazines, Netflix subscription, etc.)
- Bundle Internet and TV packages
Can You Increase Your Income?
While you may not be up for a raise at work, there are alternative ways to increase your income. Here are a couple of ideas, beyond spending less money, to increase the money going into your bank account every month:
- Do you have skills or crafts you could use to make money after work hours?
- If you are good at crafts, consider trying to sell them on Etsy or Facebook Marketplace?
- Do you have skills in graphic design? Offer your services after work hours to earn some extra money.
- Do you need another job? Consider working part-time at a retail store.
- Do you have any stuff you don’t use? Consider selling on eBay, Facebook Marketplace or Craigslist to make more money.
While it may seem complicated, affording an investment property in Austin is possible. Follow the steps above, and you should be well on your way to affording an investment property in the Austin area.
Have questions? Give us a call anytime; we would be happy to provide guidance.
Resources:
http://onproperty.com.au/can-i-afford-an-investment-property-2/
