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 they became lost in the wilderness of information, struggling to find a path through the thickets of data and analysis.
But there’s one facet of investment that is arguable 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 you 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 advisors.
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 smart investor will ensure 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 still be liquid funds on hand to keep you financially afloat if needed.
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 advisors such as a mortgage broker, property investment advisor 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.
Paul: Yeah, personally as an investor myself and an owner of a couple of duplexes. They’ve got to be for a reason and that I think is the key is that duplexes for me as an investor as long as you’ve got an exit strategy. The key that I always look at for things such as dual income properties in general is the fact that you’ve got to think who’s going to buy this property after you and ultimately that’s going to dictate the potential demand for that property long term and if it can’t be if there are instance strata title or torrenced titled subdivided and sold off separately then of only going to sell that property to an investor and that’s kind of the exit strategy that we always have to go in with mind, unless you’re paying cash or intend to play pay or are in this property for a long period of time and turn into a really long term cash flow generator for us. We always got to say that there’s got to be a very good reason to make sure that that duplex or townhouse or two side by side opportunities in single title have really got a very good purpose and a reason behind it because for a long term capital growth perspective. If you can’t cut them up you typically will see okay or good growth in the good times but in the softer times the hardest properties to liquidate and typically the first properties to soften.
But in terms of the sort of the upstairs downstairs arrangement upstairs downstairs or even side by side because a lot of people and a lot of dual income properties which potentially can’t be subdivided strata title they typically will only ever be one property with two separate residences. Technically an auxiliary dwelling you can only ever sell to a single owner and if that is the case and you can’t subdivide or sell that property independently you end up with a bit of a pickle if you don’t have an exit strategy that’s certainly is something you can handle.