When should you buy an Investment Property?
This question that pops up pretty regularly for our clients and that’s because it’s one of the most obvious and most understood ways to invest.
One of our goals at Bounce is to help get our clients into a position to be able to invest and to make sure those investments are diversified (ie, don’t put all your eggs in one basket).
The concept of an investment property is a pretty easy one to follow. You buy a house, you rent it out to hopefully pay off the loan and ideally the property goes up in value over time.
There are 2 important questions that need to be considered before you do this:
- When is the right time? (for you specifically)
- Why are you doing it?
When is the right time?
So, when is the right time?: When I say this, a lot of people think about timing the market and trying to buy a property while the market is low or prices have dropped. That’s not what I am talking about. Timing the market (property or shares) in most cases is a guess at best and only hindsight can show you whether you timed it well or not.
When I am talking about timing, I am talking about a good time for you personally, taking into account your personal financial situation and your goals.
As an example you may own your home, but one of you is on a reduced income or maternity leave. This means your household income is lower and likely your excess cashflow could be stretched thin for a few years, which is pretty normal. You could be looking around seeing the property market rise and thinking that you are missing out. The problem with this scenario is that you likely don’t have any excess income and 9 times out of 10 an investment property is not going to solve that problem.
Once you take into account repayments, rental fees, rates and insurance, most investment properties are at least initially providing negative return. This means you have to put more money into it, just to keep it going.
Realistically in this example, you could certainly argue that the timing is wrong for this family and would make life more difficult. Whilst there may be a good opportunity or a good property, the timing for this situation may not suit.
As an alternative scenario you could be in your home, with a good household income and excess cash to spare. You aren’t spending every last cent that you earn and you don’t have any major changes coming up for the foreseeable future. This could be a good time to consider an investment property. You would have the excess cash to put towards the new investment costs without pushing your daily finances down to the wire.
Why are you doing it?
Why are you doing it to begin with? This question seems simple at the outset but you need to think about it. We’ve said this in the past and we stand by it, “your investment needs to match your goal”. There is no such thing as a best investment, it’s about matching the investment to the right goal.
For another example (because I like to paint a picture): say you want to buy an investment property because you plan on sending your children to private school in 5 years and want to cover the costs. If that is the case, then the investment property isn’t going to give you what you want. Yes it receives income but you will be paying the loan, meaning the only way that you will get money out of it, is to sell the whole thing. You can’t sell a bedroom when you need access to money, so it’s a big call to sell a whole house. For this goal, an investment property just doesn’t suit the situation.
If however you want an investment property for a longer term view in relation to building wealth to retire earlier, or to build a nest egg for you and your family, then an investment property might be an excellent investment for you. If you don’t need access to the income any time soon and you are happy to have it as a longer term investment strategy, then this can be a great option for you.
There is no such thing as one size fits all when it comes to an investment property and there is no such thing as the perfect time. It’s 100% an individual consideration based on where you are at and what you are planning in the next few years. We don’t believe in making investment decisions out of fear of missing out and there will always be opportunities when the time is right for you.
Before you start looking at the prices of investment properties or going to open homes, it’s wise to answer these 2 questions honestly. If it’s not the right time for you now, that doesn’t mean it won’t be in a few years.