Private property issue #51 - How much income to invest?

“How much income do I need to invest in property?” is the most common question investors ask.

Working out whether you have enough equity (deposit) to invest is easy. But figuring out how much income you need … that’s a bit harder.

So here are four examples of people in different situations with how much income they would need to invest.

This will give you a feel for how much income you might need.

Just so you know, I’ve run these numbers based on buying an entry-level 2-bed townhouse in Christchurch, priced at $550k.

Scenario #1 – Starting-out Simon

Simon’s a single guy and doesn’t own his own home.

He’s chosen to buy his first property as an investment to rent out. He’s got no credit cards or other debt, and he’s saved a $104k deposit.

Q: How much income does Simon need to invest?

A: About $96k a year

Scenario #2 – Ruth and randle

Ruth and Randle own their home and want to buy their first investment.

They are a family of 4 (2 adults and 2 kids) and have a personal mortgage of $300k. They don’t have any other debt.

Q: How much income do Ruth and Randle need to buy their first investment?

A: About $72k each ($144k household income)

Scenario #3 – Ruth and randle (but with more debt)

Now, let’s see how much Ruth and Randle would need to earn if they had more debt.

Let’s raise their mortgage to $500k, and give them:

• a $20k credit card limit
• a $10k hire purchase loan for a lounge suite with payments of $750 a month, and
• a $50k car loan, which they’re paying off over 7 years

Q: How much income do Ruth and Randle need to buy their first investment?

A: about $111,000 each ($220k household income)

That’s an extra $76k of household income … just because they have more debt. They need to earn way more money compared to their original scenario

Scenario #4 – Ivan and Irene

Our last couple has been investing for a while. They have two investment properties and want their third. They’ve got no other debt other than:

• $200k mortgage on their own home
• $800k of investment debt (on interest only)

Q: How much income do Ivan and Irene need to buy their next investment?

A: about $82,000 each ($164k household income)

This is probably lower than you thought. Even if you have several mortgages, if the mortgages are small (and you have low debt), you don’t necessarily need to earn that much to keep borrowing.

How are these numbers calculated?

All these numbers have been calculated using our Investment Ready spreadsheet.

This is free for you to download, and you can use it yourself to see how far away you are from being able to invest.

It runs many of the same calculations that banks do when assessing your mortgage application.

But, it’s VERY IMPORTANT to point out – the numbers in this email (and in the spreadsheet) are an indication/ballpark only.

You can’t walk into the bank and say, “Andrew Nicol” told me I can start investing if I earn $96k (like Starting out Simon).”

Whether you can invest or not depends on a lot of factors, like:

• Whether you get paid a salary, or salary + commission
• How much existing debt you have, and how quickly you’re paying it off
• Whether your household income is all earned by one partner or split across two (this impacts your tax and how much income you take home).

So, to get a more accurate picture of your personal situation, you should:

1. Use our investment-ready spreadsheet to get a feel for your situation.
2. [Even better] talk to a mortgage adviser about whether you can invest.

We also released a podcast yesterday that gives more details about each of these case studies. So if you want more information, you can listen here.