Do you have several properties in your portfolio, or have you just recently settled your first investment?
Either way, you may be already contemplating your next property acquisition.
It happens to the best of us; once we start seeing the potential that property has to super-charge our wealth, and we begin to see that real financial independence is an achievable goal… well, that’s when the prospect of adding more properties to your portfolio becomes addictive!
The recent moves by the banks (at the not-so-gentle encouragement of APRA) may have put a lid on your investing goals at present.
You may now need a minimum 20% deposit in order to qualify for an investment loan with the big four banks, and comply with the bank’s stricter serviceability criteria.
So, the big question you may be asking yourself is: Can I afford another investment property?
Adopting a long-term view
Property investing is a long-term approach to wealth creation and every investor, whether experienced or just starting out, must weigh up every option and assess all variables carefully before making any hard and fast decisions.
Don’t fall into the trap of rushing your plan to hit your goals faster – this is especially important in a rising market.
You may be worried about missing out, but remember that while investing in property is a proven method for creating financial freedom, there are many investors who fail to succeed in this game.
Unfortunately, their lack of financial growth is often aided by misinformed or rushed decisions.
From finding quality properties to structuring your finance, there are many, many factors to take into consideration.
So which specific factors do you need to address when deciding if you can afford another property now, in the near future, or not for quite some time?
This is how I would suggest you begin:
Analyse the ‘safety’ of your current situation
By this I mean, you need to weigh up the safety of your situation at present and assess how things might change in the future.
For example, how would you fare if interest rates went up by 1% or more?
Or what if your situation drastically changed due to a relationship breakdown, or having children – or you suffered a debilitating illness or disability?
What if your car needed to be replaced, or your business had a tough year?
What if one of your rental properties was damaged or the rental market turned suddenly?
How long would you financially survive?
Survival is about cashflow, and cashflow comes from different sources like your rental income, wages, and your finance options, such as a line of credit.
The sudden loss of a stream of income, or finding yourself in an unexpected financial difficulty, will undoubtedly have a negative impact on your cashflow.
And that’s life!
We have to expect the unexpected from time to time.
You can budget and plan and have a colourful spreadsheet, but all those perfect sums on paper can change in an instant – and that’s why you need to factor in a “rainy day” financial buffer.
A buffer helps protect you in times of downturn, whether they’re personal setbacks or because of market fluctuations.
Then, analyse the ‘safety’ of your potential investment.
After reviewing your situation and working our how secure your financial position is, you need to triple check the safety of your potential investment.
This is where it’s important to have access to accurate research in the property market you are looking at purchasing in.
For example, if the market you’re considering is at its peak in the property cycle, then you’ll need to carefully consider whether you want to invest in that market, since it is likely to enter a downturn phase before it rises again.
However, if the market is experiencing a downward trend – I’m thinking of regions such as Darwin and Perth – then you need to consider that it might take several years before that property market turns around.
But how do you work out the ‘magical formula’ to assess whether you can truly afford another investment?
The truth is, it depends on your individual circumstances.
If your question is ‘can you afford your next investment’, look carefully at your financial situation, your borrowing power, and the future of the property market in context with the amount of buffer you need, and whether it’s achievable for you currently.
If the goal is to release you from financial confinement, then don’t put yourself in a position where you could find yourself shackled by the ups and downs of the property market!
Keep your investments secure to ensure their long-term success, and yours.
Regardless of your goals, what I do know for sure is that having a buffer in place to manage unexpected expenses is critical… as it thoroughly researching your potential next investment, to ensure it matches your expectations and strategy, now and down the track.
It’s all about keeping you and your investments safe and secure.
By keeping these aspects top of mind, you can protect yourself as much as possible from added stress – both financial and emotional.
Want to look into this a little further?
If you’re looking for independent advice about your property investments, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.