Can I afford an investment property?

The most common question investors ask is: “Can I afford an investment property?”

But whether you’re a first-time or a seasoned investor – it’s often hard to get a straightforward answer.

Why? There are 3 factors you need to look at when working out if you can afford an investment property (or not):

1. Deposit – Do you have enough deposit? (in equity or cash)
2. Income – Is your income high enough for the bank to approve your mortgage?
3. Cashflow – Can you afford to top-up the mortgage each week?

In this article, you’ll learn how much money you need for these 3 factors. You’ll also be able to use 3 calculators. These will help you figure out if you can afford an investment property or not.

By the end of the article, you’ll know if you can afford an investment property.

You’ll also learn what you can do if you aren’t quite ready to invest – yet.

Do you have a question or comment about the cost of buying an investment property? Feel free to leave your thoughts in the comment section at the end of the page.

#1 – Deposit: How much do I need?

Let’s start with how much an investment property costs.

The minimum you’ll usually pay is:

• $550,000 for an entry-level New Build property and
• $400,000 for an entry-level existing property.

This means you’ll need a deposit of:

• At least $110k for a New Build. That’s because you need a 20% deposit
• At least $140k for an existing property. That’s because you need a 35% deposit.

But remember, if you’re borrowing money to buy an existing property, 9 times out of 10, you need to renovate it.

If you don’t the cashflow will likely be terrible. This is because you pay extra tax through the interest deductibility rules.

You’ll usually need another $50k for renovations.

Once you include renovation spend, the minimum deposit you need is:

• $110k for a New Build, and
• $190k for an existing property.

The good news is: You don’t need to have a deposit saved in cash.

Many Kiwi investors buy properties without putting any cash down at all.

Instead, they use existing equity in their home for the deposit. Here’s how this works.

How do I borrow the deposit for an investment property?

Many Kiwis have “usable equity” within their homes.

Usable equity is the amount you can borrow towards a new investment. The formula to work out how much you have is:

(Home Value x 0.8) – Personal Mortgage = Usable Equity.

For instance, let’s say your home is worth $1 million, but you have a $500,000 personal mortgage left.

The maximum amount you can borrow against that property is $800,000.

But since you already have a $500k mortgage, you have a maximum of $300k left in usable equity.

That means you can borrow $300k against your home and use it as the deposit for an investment property.

Now, with that $300k you can buy investments worth:

• $857k (max) if investing in existing properties
• $1.5 million (max) if investing in New Builds.

To save on the number crunching, you can use our useable equity calculator.

This helps you to figure out how much you can potentially borrow against your own home for deposits:

#2 – Income: Will the bank give me the mortgage?

On top of the deposit, you’ll probably need a mortgage, so the bank must be willing to give you the money for the house.

They won’t automatically give you the money just because you have the deposit.

You also need enough income. They want to make sure that even if a few bad things happen, you’re still be able to afford the mortgage.

The income side of a mortgage application is often harder to calculate.

But, we generally say it’s worth digging deeper if your household income is $100,000 or more.

You might use a mortgage calculator. You see the payments the calculator says and think: “Yup, I can afford that”, but the bank might not agree with you.

This is because the banks run lots of calculations to decide if you can afford to pay the mortgage.

These calculations are usually referred to as “servicing”. Can you afford to service the mortgage?

To see the amount you can borrow, use this (loose) ballpark calculation:

(Your income) x 6 = the amount you can borrow

Note: this multiple can change. When interest rates are lower, most mortgage advisers will use 7x.

For instance, if you and your partner earn:

• $120k through your jobs, and
• $30k through your rental property

You have $150k in household income. Multiply that by 6 and you get $900k. So, the bank may lend you up to $900k.

When a bank looks at your mortgage application it’s a bit more complicated than that. They “stress test” your application. This includes doing things like:

• Could you afford the mortgage if the interest rate was 9%?
• Could you afford the mortgage if you didn’t have a tenant for 3 months of the year?
• What if your mortgage repayments were principal and interest? (even if you get an interest-only loan)?

These are all complicated and technical, so use our calculator to see how much you could potentially borrow based on your income.

#3 – Cashflow top-up: Can I afford to hold onto my property?

As well as the deposit and income required to buy an investment property, you also need to be able to hold onto it.

Right now, while interest rates are high, the rent won’t usually cover all the rental property’s costs.

This is sometimes called negative gearing. It’s very common when you borrow all the money to invest in property. i.e. you don’t have a cash deposit. 

About 90% of investment properties today are negatively geared. That’s according to Valocity, a data firm.

So, the investor needs to “top-up” the investment property’s mortgage.

This is typically somewhere between $350 – $500 a week.

This is the case whether you invest in a New Build or existing investment property.

For example, here are 3 different properties with the cashflow of each:

This assumes that you’re borrowing all the money to invest. If you have a big cash deposit, the top-ups will be lower.

But the cashflow of an investment property generally improves over time. This happens as rents rise and interest rates fall.

There are lots of different factors that impact the cashflow of your property, so you can either use:

• Our cashflow calculator below
• Download our return-on-investment (ROI) calculator, which will create a 15-year cashflow forecast for you.

This will give you a sense of whether you can afford an investment property on an ongoing basis.

Can I actually afford an investment property?

If you’re planning to buy a New Build property, you’ll need:

• $110k of useable equity (or cash) as a deposit
• Enough income to service the mortgage. Generally, a household income of $100k or more
• Enough spare cash to pay $350 - $500 a week to top up the property.

If, on the other hand, you plan to buy an existing property, you’ll need:

• $190k of usable equity (or cash) as a deposit and for renovations
• Enough income to service the mortgage. Generally, a household income of $100k or more
• Enough spare cash to pay $300 - $500 a week to top-up the property.

If you’ve read this article and worry you can’t afford an investment property right now – that’s OK. We can still help you.

There are a lot of people out there who want to get ahead financially, but who can’t get a loan to invest. At least, not yet.

That’s where you can read our investment-ready playbook. This gives you real strategies you can use to get investment-ready faster.