Finance advice

Why property is a game of finance

By Paul Glossop

Real estate investment can seem like a complex beast. Ask anyone who has done the deep dive into gaining a property education and you might find that they too were once lost in the wilderness of information, struggling to find a path through the thickets of data and analyses.

But there’s one facet of investment that is arguably one of the most crucial and least understood when you’re first learning about bricks and mortar – particularly as this element can make or break your future. It can keep plans on track, or have them derailed and careening towards almost certain disaster.

In the rule book of real estate, property really is a game of finance.

Why the numbers matter

Before you even open your first book about real estate or begin a google search of property forums, the very first set of analysis all investors must undertake is to determine their ability to borrow funds and service loans.

It makes no sense to disappear down the rabbit hole of research if you can’t gather the dollars.

So, your financial capacity is the determining factor.

First and foremost, run your household budget and do your spreadsheet of assets and liabilities. Preferably tackle these exercises under the watchful guidance of a mortgage broker who has experience in the investment field.

By setting out these salient figures, an investor can work out if they can afford a loan and, if so, how much they are able to invest. It makes no sense to be all over the property portals trying to find excellent options in Bondi Beach, Sydney if your budget only extends to Coopers Plains, Brisbane.

Your time is valuable. I’ve seen potential investors become exhausted by the options because they lose themselves in information about locations, price points and market sectors that are, frankly, well beyond their financial capability. Save yourself the stress and do your finances first.

Prepare to succeed

Once you’ve gone through the exhaustive exercise of finance, you have a distinct advantage over others when it comes to jumping on unexpected opportunities.

Getting finance approved can be a struggle, but once you’ve done the hard yards you’ll have cleared a hurdle that allows you to take the driver’s seat when securing a property.

One of the best aspects of using a buyers’ agent is our ability to secure off-market deals for clients. Many times, these come across our desk because of the relationships we’ve formed with agents in our areas of interest. They will have a holding where the owner is keen to sell and will take a discount to avoid wasting time.

When a deal is presented before it hits the market, and it meets all the criteria of a great option, you want to move fast to lock it down.

Being finance-ready gives you, the buyer, that comfort. You can go in with a cash offer knowing the bank has already approved you for a loan.

It’s one of the best way to profit from property, because that discount means you have a little extra equity in the holding right from the get go.

Two top tips

When it comes to finance, there are two key mistakes many investors make when they aren’t operating under the guidance of experienced advisers:

One – they forget to factor in life’s big financial events.

If you go all-guns-blazing into a 30 years strategy based purely on your current position, there can be grief to come.

You need to make plans so as to afford and enjoy life outside of the investment loan. If the kids are due to head off to private school soon, this must be factored in to your figures. If you and your spouse are thinking about starting a business in the next two years – congrats, but your family’s cash flow could be running dry for a stretch.

Life keeps moving – make sure you mitigate the pain by doing a proper job of allowing for future events.

My second tip is to expect the unexpected.

Interest rates can change, rental demand can drop and even the best of us can be out of work. While these unfortunate events might be beyond your control, there is a way to soften the blow via your finance.

Buffers should be an essential element of your financial process. You must factor in tolerances – particularly with your cash flow – so that, should the worst happen, you’ll be ready to address the shortfalls.

I believe a smart investor will ensure that they can service at least six months of essential operating costs including household’s expenses and loans. Kept in an offset account against your PPOR, your buffer will provide the benefit of a reduced interest, but will still be liquid funds on hand to keep you financially afloat if needed.

Budget smudget

While I’m all for being across the numbers from a finance perspective, I also don’t believe in having your lifestyle hamstrung by a strict home budget once you’ve got your processes up and running.

In my opinion, most well-informed households that set up an initial financial plan grow accustomed to their essential spending and, in time, find that they don’t need to strictly account for every dollar just to stay ahead.

Get smart with your figures and you’ll eventually and automatically be able to manage your wallet without having to check the spreadsheet each day.

Seek professional help

Tackling finance early means you understand where the line in the sand sits when it comes to purchase price and rental return on your investment property.

With these important numbers in your grasp you can begin to research investment options that fall within your financial capabilities.

I believe the best move you can make is to surround yourself with trustworthy, experienced advisers such as a mortgage broker, property investment adviser and buyers’ agent who can guide you safely through the landscape of investing and finance. These folks are essential members of the dream team that’ll reduce your risks and boost your outcome.

Happy hunting!

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About the Blogger

Paul Glossop

Paul Glossop

Paul Glossop is the founder and director of Pure Property Investment. Paul has built a substantial property portfolio, focusing on the fundamentals of property investing. He founded Pure Property Investment to enable investors to experience a truly holistic approach to property investment. From the initial consultation to the acquisition of the property, Pure Property Investment is a true partner for its clients through the entire journey. We specialise in sourcing properties Australia wide that are below market value, positively geared and primed for capital growth.

FROM THE WEB

podcast

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

3 big property investment myths busted open
5 steps to take on low-risk property developments
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

How technology is changing the lending environment
Lessons from a falling market
APRA investor measures have ‘run beyond their usefulness’: industry body

 

AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Getting finance approved in this tightening lending environment

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