The 4 things you should have before you consider buying an Investment Property
Investment properties are one of Australia’s most loved investment assets. Everyone either wants one, has one, or has a very strong opinion for or against.
Investment properties can be a great way to build wealth, but they aren’t a guarantee and there is more nuance to it than people will have you believe.
Often the factors around whether you are successful in your investment property journey, come down to the preparation you do before delving into this area.
Whilst it’s not a guarantee, there are certain things you can do to set yourself up for success.
Here are the 4 things that you need to look at before investing in property.
1) Have your own home:
This could be an unpopular opinion amongst the rent-vesters, but we believe that the majority of people should have their own home before they buy an investment property.
There are of course exceptions to the rule, but for most people who have jobs, families and a steady lifestyle, prioritising your home prior to investing makes sense.
2) Have a spending plan that means you aren’t spending more than you earn:
You can call it a budget, a spending plan, or whatever you like, but you must have a banking and financial set up that ensures you don’t spend everything you earn each week.
Why? Because contrary to popular belief, investment properties usually cost you money. In this high interest environment, most people are topping up their investment property loans, but even in more ‘normal’ times, this can still be the case.
In order to be successful with an investment property, you NEED to have excess cash available to cover any issues. And there will always be issues, it’s a part of life. The hot water system will go, you won’t have tenants for a few weeks, or interest rates will go up. Plan for the worst and expect the best.
Most people say “but i’ll get tax back” which may be true, but it is still costing you money. You don’t get back everything you paid in your tax, so you are the one left covering the shortfall.
You need strong excess cashflow regularly to support a long-term investment property.
3) You need an Emergency Fund:
Similar to above, you need to some extra cash around.
Everyone needs an emergency fund and arguably you need one that covers 6 months of your spending as a base.
If you have an investment property, your emergency fund needs to be a little higher because your commitments have just increased, so you need an extra cushion to help keep you afloat during times of uncertainty.
4) Ensure you have Income Protection Insurance (at a minimum):
All of your plans rely on your income to continue, including property investment, so making sure you have income protection insurance is important.
Do you really need to have all these things in place before investing in property?
The short answer is no, people often do it without any of the above. Sometimes it works out and sometimes it doesn’t and I have seen both.
Investment properties have high upfront costs (purchasing costs, stamp duty tax etc) so this needs to be considered a long term investment. If you find yourself unable to support your investment property and have to sell it within a couple of years, chances are you’ve got no benefit or, you’ve lost money, which is not the point.
Investing in property is a big deal and probably more serious than people give it credit for. You are borrowing money to buy an asset that you are hoping goes up in value and provides you with income. It can be a great tool in your overall wealth strategy, but like anything, taking the time to set yourself up and do it in a way that supports your life, is time well spent.