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Firstly we need to find out what the limits are for Robert.
A . Borrowing capacity.
Rob can borrow about $550,000 to buy an investment property. This takes into account an assumed future rent of $500 per week for the property.
B . Equity/Savings.
Rob has $30,000 in savings in an interest account. This will be an issue as he needs about $50,000 to start.
Based on the numbers above Rob could invest in a house and land package, say in QLD, worth $380,000. The rent for the property in mind is expected to be $400 per week.
Note that at 90% loan to value ratio (LVR), Rober will have to pay Mortgage Insurance (LMI) of about 8,000. This fee will be caitalised (ie added to his loan), so he will not need to fund it out of his savings.
The issue is that Rob has not got enough savings to fund the $43,900 required. So he will first have to save up to around $50,000 to be able to safely invest in such a property.
Once his savings target is achieved, he will be ready for an investment property. According to his calculations he will be able to top up his existing savings to $50,000 within 12 months. He will then have a buffer in his savings to comfort his cash position. The property will be cash flow neutral at 5% interest rate and setting up the loan on an interest only basis also contributes to making sure he does not overstretch his cash flow. We did some projections showing what his cash flow would be if interest rates went up to 7% and he was comfortable that he could afford the property at this level of interest (about $60 a week).
Rob could opt to borrow more than 90%. However LMI jumps steeply above 90% (to about 4%), and most lenders would limit capitalisation of LMI to 97%, so in effect Rob could only apply for a 93% LVR loan. It is economically less attractive and would also stretch him financially. We advised against this.
Once the property is acquired, we will be looking at setting up an offset account for Rob, against his investment property, and transferring his remaining savings into it. In effect this means that he will earn interest on his savings at the same rate as he pays his mortgage.
When his first investment property is in place Rob will be concentrating on increasing his offset account savings, some of which he will later be able to use for his next property purchase.