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Hudson Financial Planning - A look at investing in property, is LMI really that bad?

A Look At Investing In Property, Is LMI Really That Bad?

Written by Juanita Wrenn – Managing Director

Investing directly in a property is a dream of many and definitely worth considering for individuals who have the capacity to invest, the cash flow to service and the time frame to hold a property. In the current climate, with historically low-interest rates, tight vacancy rates and a well known undersupply of quality housing, it makes sense to invest in bricks and mortar – provided you have the intention of holding the property for at least 7 years. This is to account for not only the property market cycles but also to offset the significant costs associated with purchasing and selling the property. The property provides investors with a larger amount of capital in the market (and greater ability to leverage) with the added bonus of some lucrative tax deductions – particularly when it comes to newer properties. The following table looks at the approximate costs, or in the current climate of cheap money, the approximate gain, of holding a property BEFORE tax.

Purchase Price$700,000
Rental Income5%$35,000
Interest Expense3%$21,000
Property Expense1.5%$10,500
Monthly Expense$35,000 – $21,000 – $10,500 = $3,500$3500/12 = $290 per month
Cash Flow Positive

Two main pathways to purchasing a property: saving a deposit, or utilizing existing equity in your principle place of residence.

Lenders Mortgage Insurance (LMI) helps home buyers from having to postpone buying a home due to the time it takes to save up the typical 20% deposit. It allows people to buy a home sooner with a deposit as low as 5%. If property prices are increasing, getting into the market so you’re on board for price growth could be more beneficial than being forced to wait and pay much more for a property.

Paying LMI is up to the individual, the market you’re in, and whether the financial (capital growth and or cash flow) and non-financial benefits (security and stability of property ownership) are worth the cost.

LMI rates vary from bank to bank and just as our broker shops interest rates for you, we also shop LMI rates. Interest rates also creep up when the LVR is over 90%. So 90% is often a good medium to aim for if you are looking to use LMI.

Medical Professionals, lawyers, professional athletes and entertainers, CEO’s earning above $350k and accountants, often qualify as low risk and on a case by case basis we can get the LMI waived with some lenders.

Once you have made up your mind, and you have looked at your financial situation to make sure that it is the right decision, it’s time to find the property. This can be daunting, and much research and confidence are needed to make an educated decision. For many clients, they already know where and what they want to invest in, but for clients who are needing direction, Hudson now has Michael Taylor working directly with our clients.

Click here to learn more about Michael and how he can help Hudson clients with their property education.

Property is an excellent investment option and in the current interest rate environment, there are some great investment opportunities.

Click here to talk to a Hudson Financial Adviser to see if a property is the right decision for you.

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