You want to buy an investment property, so where do you begin? If we had a dollar for every time someone asked us how to start, we would be billionaires and not just millionaires by now. So the intention here is to give you a starting point to help you on your way.
Because everyone’s circumstances are different, it’s important to develop your own personal investment strategy. Developing your own investment strategy will set a direction for you to move forward in creating wealth and will also help you focus your searches on properties that fit your investment strategy.
When developing your personal investment strategy you’ll need to take into consideration the following key factors: lifestyle, borrowing capacity, available equity and asset protection.
Lifestyle is about the quality of life you want to have while on your investing journey. By this we mean, how much of your weekly cash flow are you willing to invest in your investment properties without adversely affecting your lifestyle? Is it $20 per week, $50, or can you afford $200? Doing a budget will assist you with ascertaining how much disposable income you can afford to spare each week.
The reason why this is important is that high growth properties, which create real wealth, will generally require you to dip into your pocket each week. If you invest in too many high growth properties it will impact on your lifestyle. In other words, you don’t want to be eating baked beans to support your investment properties. We’ve known of too many investors who have bought into high growth properties and dipped into their pocket each week, adversely impacting their lifestyle to the point that after a couple of years they sold up, lost money and labeled property as a “mug’s game”. Establishing the lifestyle you’re prepared to have while you invest will enable you to ascertain whether you’ll need to focus on purchasing cash flow or growth-type properties.
Borrowing capacity determines how much the banks will lend you to invest in property. This in turn will help you to establish the market value of the investment property you need to target. It’s no good spending weeks finding a red-hot deal, only to find that the banks won’t lend you the money to buy it. Most reputable lenders have quick mortgage calculators that will be able to provide you with an idea of your borrowing capacity. If you require a more accurate assessment of your borrowing capacity, then it will require more work with the lender. Remember that all lenders have different lending rules and therefore your borrowing capacity may differ from lender to lender. Some lenders may in fact refuse to lend you anything, whereas others will be able to provide you with significant levels of borrowings. It’s best to shop around for the best deal.
As part of your investment strategy, your available equity will also help you to establish the type of property that you’re able to purchase. All lending institutions will require some deposit to be lodged against a property, the size of which will be determined by the level of risk the lender assesses you to be at. Factors which influence the risk that a lender sees you at include quality of employer, salary, disposable income, credit rating, existing debt levels and debt capacity. Some lenders will even provide 100 per cent finance to low-risk borrowers. The same lender may only lend 70 per cent if it assesses you as being a high-risk borrower.
It’s also a good idea to consider asset protection as part of your strategy. This is the term used to describe a process for minimising the risk of someone winning a litigation action against you and forcing you to sell your investment property in order to fund the payout. Asset protection is generally related to the entity that the investment property is purchased in. Commonly used entities include trusts, personal name, businesses, and partnerships. Your accountant and solicitor should be consulted to determine which entity suits your situation the best.
In summing up, to formulate your investment strategy you need to work out how much money you can afford to invest in property. Using a budget planner will assist you with that. Then you need to consult the experts to find out how much money you can borrow and, once you’ve found your red-hot deal, what entity is best for you to purchase the property in. Setting your strategy upfront will assist with minimising any risks in the future.
Until next time, happy investing.
Investor and author of 47 Biggest Mistakes in Property Investing and How to Avoid Them.