The hidden cost of changing your home to a rental property
A common scenario is people deciding to buy another home to live in, and changing their home to a rental property rather than selling it. The rationale is solid. The loan on your now investment property is relatively low because you were paying it off when it was your home. You have plenty of equity that you can use to help buy your next home avoiding saving a deposit. You do a few sums and see that the rent you will get will cover the interest payments on the loan and the other property costs ie agents fees, insurances, repairs etc.
Great you think, we now have an investment property that pays for itself. On the surface that’s true, but looking at your greater financial situation a different picture emerges. The hidden cashflow drain.
Given the equity in your current home you figure you can borrow the whole cost of your next home plus enough to cover stamp duty, legals etc. Looks simple, all you need to do now is make the repayments on your new loan out of your income as your investment property is paying for itself. But, what’s the cost of this arrangement?
If you had sold your existing property rather than renting it, you would have had a chunk of money to use as a deposit and costs on your next purchase, consequently lowering the amount you need to borrow and pay for out of your income. This”chunk” of money is the real cost of your investment property. Assume this “chunk’ of money was say $200,000 being the proceeds of the sale of the property, that’s going to cost you roughly $10,000 per year in interest.
This is the cost real cost of your investment property. It’s not really breaking even, it’s actually costing you $10,000 per year out of your after tax income. Now you may think this is fine, because capital growth may cover that, but what if it doesn’t? It’s $10,000 per yer, every year that you’re not able to pay off your new home loan.
Before you decide to buy another property and change your home to a rental property, come and talk to us about getting your finances the right way around, or at the very least be aware of the costs. Contact Paul at paul@halogenhomeloans.com.au or 0410 520 398.
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