Why property investors aren’t necessarily as rich as you think they are 1/2

Investors have surged in the Sydney and Melbourne property markets at record levels over the past few years, with many amassing significant property portfolios.

Many Gen Y investors have made headlines for having a large number of investments to their name, often worth millions of dollars.

But are they really as wealthy as they appear?

Why the investor with 10 properties might not be as rich as you think. Photo: Nic Walker

Answering this question is about understanding how they have managed to buy properties in the first place.

The first property

Getting the first property is widely described as the “hardest” for investors and first-home buyers alike.

At this stage, saving up a significant cash deposit – or using a parental guarantee to top up a deposit – is the most typical buying approach. Without any assistance, most investors and first-home buyers do have to do the hard yards to save funds, let’s say $100,000 plus costs.

But for those buying an investment property rather than a home, there is a difference worth noting.

While investment loans are typically now subject to higher interest rates, in many situations investors are seen as more serviceable – meaning they can borrow more – than home buyers on the same income. This is for one simple reason: having a tenant in the property is considered to be income.

Research undertaken by Macquarie analysts in 2016 found someone earning $105,000 a year could borrow $813,000 as an investor, compared to $588,389 as a home buyer.

If a first-time property investor is keeping down their living costs by renting somewhere cheap, living in a sharehouse, or staying at home for longer, they have a much higher ability to borrow.

In addition to this increased ability to borrow, they can also get on the ladder earlier by buying wherever they can afford and think there will be good growth – compared to first-home buyers who are restrained by where they are able to live and work.

Investors are also frequently more able to buy in more affordable areas – where deposits are already cheaper – such as regional locations or the outskirts of major cities. By buying cheaper properties, it means they may be able to buy more real estate in the future.

Every investor has a different approach. But let’s assume our investor bought two apartments five years ago in an investor favourite area, such as Sydney’s western suburbs, for $250,000 each – prices that were achievable in 2012.

 

 

reposted from domain.com.au