3 steps to financing your first investment property

Plus, what you should know about improving your borrowing power.

Before you start trawling online real estate sites for your first investment property, it's important to get your financial basics right.

And, the best place to start is by trying to improve your borrowing power. Why? Because the state of your financial position when you're ready to buy your first investment property will determine not only how much you can spend, but also what you might pay in rates and fees moving forward.

In short, there are three key ways to boost your borrowing power before seeking finance for your first investment property:

1. Reduce your credit card limits and minimise your outgoings;
2. Pay off any other unsecured loans; and
3. Make adjustments to have any government benefits paid ongoing rather than at the end of the year.

Once you've worked to improve your borrowing power, here are three important factors to consider about financing your first investment property.

EQUITY EXPLAINED
If you own a home and have built up some equity in it, you can use this to fund the deposit and costs for the purchase of your first investment property. If you do use your current equity in this way, be sure to set up a separate loan facility, rather than just increasing your home loan amount.

UNDERSTAND LMI
When considering how to finance your first investment property, look at the pros and cons of paying Lenders Mortgage Insurance (LMI). For example, if you can avoid paying unnecessary costs such as LMI, do it, but sometimes it makes sense to pay mortgage insurance if you don't have enough equity left over for a buffer. By paying a little LMI, you can maintain some cash flow for emergencies or for future investments.

SENSE A SHORTFALL
Knowing your numbers before you invest is vital. Aside from looking at the major figures such as total purchase price and stamp duty costs, it's important to calculate any shortfall you might have to shoulder between rental income (or times when the property might be vacant) and they loan repayments. Work out the shortfall you are willing to commit to the repayments from your income and base your purchase price on that not forgetting to take into consideration possible movements in rates.

P.S. Don't miss our new blog: Investing in property for beginners.