How to Efficiently Calculate the Budget For Acquiring A New Property?

Purchasing a property is a high-value investment that most people don't do on a frequent basis. There is a lot of paperwork, money, and several regulations involved, which you obviously need to be aware of; and of course the confusion of actually finding a property that is worth your money. Most people who are in the market to purchase a property, whether for residential or commercial purposes, will rely on some kind of external financing to complete the transaction. 

Whether you are taking a loan, getting a mortgage, or using any other financial service, this becomes another thing that you need to think about other than the property itself. Most of these lending options will be long-term engagements that can last multiple decades. The compounding cost of such services can be quite a lot and you don't want to tie yourself into a situation where you are paying more than you can afford or more than you need to for that property. Also, you want the financial aspect of the property purchase to have a level of risk that you can afford. Just because you are getting a great deal, or something is available for below market price, doesn't mean you should take on a level of risk that you can't bear for extended periods of time. Here are some useful tips that will help you create a budget that is both affordable and appropriate for your real estate purchase.

1.  The 28% Rule

Most financial advisors and even lenders will tell you that the installments that you pay on a monthly basis should not be more than 28% of your entire income. This ratio of how much you pay versus how much you earn is known as the debt to income ratio. The important thing to know is that most lenders will have a limit on the maximum amount of the ratio, usually around the 40% mark. Some lenders might go beyond this limit but this drastically increases risk and consequently will increase costs. Ideally, you should stay well under the 30% mark to make sure you have enough left over to accommodate operational costs and also cover the costs of other loans you might have.

2.  Ongoing Expenses

A lot of people look at buying a home as a solution to all their problems, but in reality, if you choose the wrong home it could be the start of a whole range of other challenges. More importantly, in expensive countries like America or Singapore, it can also be extremely expensive to maintain a home. For instance, while it is easy to find a Singapore property for sale, it’s a bit more challenging to realistically understand the cost of actually living there. Costs of homeownership do vary a lot from region to region so it is important that you consider associated expenses when purchasing. This will include things like home insurance, utilities, repairs, maintenance, and other expenses.

3.  Security

If you are handing hundreds of thousands of dollars in the form of a loan, even to someone you know, you would probably like to have a solid guarantee that you will get your money back. Similar is the case with financial institutions and commercial lenders. Usually, there is the option of a security or a collateral when applying for a loan. It is important to know the difference as they both pose very different risks. In the form of a collateral, whatever you put up will be sold off in case you default. A collateral could be a car or another property or anything else with similar properties that the lender will accept. Security-based lending is when you give a financial asset, such as a stock or a portfolio of shares, to a lender to secure the loan. The main advantage to the security-based lending is that you are still able to earn the profit from the security during the time that it is used as a countermeasure for the loan.

The other thing to consider when setting a budget for a property purchase is the list of requirements for the down payment. Some landlords might require only a 5% downpayment while others might ask you to pay 70% as a down payment and put the rest in an installment plan. For the purchaser, this significantly changes the price of the purchase and also impacts the kind of loans that you are able to get. Different lenders tend to prefer certain kinds of property agreements. Also, for the buyer, this can change how much cash they need to actually begin the purchase. Have a look at what your options are and if possible try to negotiate the down payment terms with the seller.