We have all heard the expression, ‘there is no time like the present.’ But does this apply to property investing? Should a new investor just jump in and get started as soon as he/she feels the urge? If not, how can a new investor know the time is right?
Blogger: Paul Wilson, Educating Property Investors, We Find Houses and We Find Finance
Most people by now know that the best investment is in property. Knowing this, however, and knowing what to do with that property once you buy it, are completely different subjects. Property investing is not like learning to swim. If you jump into the water and do not swim, you die. If you jump into property investing without knowing what you are doing, you die financially, but because you are still alive to bemoan the situation, in some ways it can be worse. In this blog, I am going to explain when it is a good time to begin investing in property.
Here are a few simple questions to consider prior to investing in property.
How much do you know about investing in property?
The reality is that buying an investment property is easy enough, if you have the deposit and the borrowing capacity to make the purchase. There are plenty of Seller’s Agents and lenders who will be happy to help you make your purchase. But how do you know if the property is going to sustain the right returns for your situation? How can you be certain there are no ‘hidden’ problems you will have to deal with later? How do you develop your strategy in such a way that you will be able to buy another fairly soon and continue to grow your portfolio?
You may have heard the saying that Knowledge is Power, I’d like to expand that by saying that the application of your knowledge is power, as with no application then you may as well have no knowledge at all. If you have no clue about the above questions (and these are but a few of the things you should consider), then you are simply not ready to invest in property. I am not trying to spoil your fun, but it is really no fun to fail in property investing because the failure can follow you for many years. It is far better to learn and prepare yourself before jumping in.
How much cash and or equity do you have and how do you plan to use it?
Many first-time property investors use all their cash and equity on their deposit and buying costs when seeking finance for a property. This can be a dire mistake for if there is an emergency, you are going to need excess funds or face serious consequences. I like to tell new investors to set aside a cash flow buffer as well as invest in Landlord Insurance for such contingencies. Then if something happens to disrupt the cash flow from the property, such as a fire or delinquent tenant, there are funds to cover the repayments.
Also, if you use all your cash and equity in making the purchase even if not necessary, you will have nothing left for making further purchases until you accumulate enough. Ideally you want to spread your own funds to cover the deposit and buying costs of as many properties as possible, as long as you have the ability to service the loans. If you only have a deposit of $30,000 then clearly you can’t really spread this over many properties. If you have equity and savings of $100,000 then it may be possible on a 95% LVR to cover the cost of 2-3 investments priced between $250,000 to $300,000 each. Putting your full available equity of $100,000 into one single investment could dampen your plans for growing a quick and healthy portfolio.
Should you seek positive geared or negative geared properties and how can you identify these?
Once again, this is where ‘knowledge is power.’ If you simply go buy a property just because it seems like a good deal or it looks nice, you are not really going to know whether you can afford the repayments or make a profit. Making such a purchase would be like trying to throw something at a target after I have blindfolded you and spun you around a few times. Odds are, you are going to miss.
For instance, if you buy this ‘nice’ property because the seller’s agent has told you it is making money and once it is in your hands you find that the rents returned do not make up the entire repayments, the council fees, and other expenses, will you have enough from your personal finances to continue with the repayments? If not, what can you do then? Can you cover the shortfall or raise the rents and still have tenants or will you have to sell the property, likely at a loss?
Also, if you are buying the property for the tax advantages, have you calculated in advance whether doing so is to your advantage? In most cases, unless you are in an upper income bracket, negative geared properties may not benefit you enough to make up for the loss.
These are but a few of the things you should consider prior to making a property investment. If I have frightened you from just jumping in… good. That was my intention. I often have new investors come to my office seeking advice because they just ‘jumped in’ because ‘there was no time like the present’ and found themselves in deep financial trouble. Naturally, I help them but often it is not easy. It is my hope that before you begin property investing, you will take the time to learn how to protect yourself with knowledge.