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How Do You Know When Your Finances Are Ready?

In this article:

Take this test to know if you're ready to make your first property investment.
 

While there's no magic dollar figure to signify your finances are in the right shape to invest, there are several tests of readiness. If you answer yes to these questions, it’s an indication you’re in a good place to start building a property investment portfolio.

 

Question # 1: Can your cashflow cope when investment expenses exceed rental income?

Deduct your current expenses from your income – use a budget calculator – and consider whether the amount left will be enough to cover the costs of an investment property. You may be counting on the rental income paying for the home loan, but financial readiness means having a backup plan if this doesn’t happen. 

As an investor, it’s not just loan repayments you’ll need to budget for. Your ongoing costs may include council rates, land tax, water rates, building insurance, landlord insurance, body corporate fees, property management fees and maintenance fees. Add to this tally the advertising fees and cleaning costs each time your tenants vacate.

The costs of repairs and maintenance will depend on the age of the home and the general wear and tear, but a common guide is to expect these costs will equal 1% of the property value on an annual basis.

Not only do you need to be sure you have enough money to cover these expenses, but you will also need to prove this financial capacity to your mortgage lender. When applying for an investment loan, the lender will want to know you’re earning a consistent income and have the documentation to demonstrate a stable cash flow.

 

Question # 2: Do you have spare cash saved up to cover vacancy or unexpected expenses?

It’s essential to have a good savings buffer to fall back on. There may be periods when the property is vacant, and you’ll have to cover mortgage repayments and expenses without the benefit of rental income.

Hitting a rough patch in your finances such as a redundancy or sudden illness should also be planned for. An emergency savings fund of enough money to cover living expenses for at least three to six months is considered a prerequisite for property investors.

 

Question # 3: Do you have a budget?

Being comfortable with the discipline of maintaining a budget is a great sign that you have a handle on your finances. With a clear view of your income and expenses, you can see at a glance whether you can cope with the ups and downs of property investment, such as the potential of a future interest rate rise.

Budgeting skills are also needed when it comes to saving up for upfront investment property costs. Apart from the deposit, you’ll need to set aside money for expenses like government and lender fees, home and contents insurance, legal fees and building and pest inspections.

Take the first step

Question # 4: Is your debt minimal?

So what’s meant by minimal? Not all debt is bad debt, so it’s important to consider whether your debt has the potential to have a crippling effect on your finances.

High-interest debt like credit cards will curtail your cash flow, so it’s the kind of debt you want to avoid if you’re considering property investment. It’s also the kind of debt that can make lenders nervous, which means you may have trouble getting a loan or it may substantially reduce your borrowing capacity.

The debt of an existing home loan may not have such a negative impact, especially if you’re at the stage where you’re comfortable paying it off. This kind of debt is considered productive because you’re investing in an asset that has the potential to produce income and create wealth.

 

Question # 5: Do you have a good credit report?

Your credit rating is an essential factor that lenders use to determine your suitability as a borrower and what interest rate you will be offered.

Under existing laws, Australians have the right to find out what’s in their credit report and correct any wrong information. It won’t cost you anything to obtain a copy once a year.

Signs of a good credit report include on-time loan repayments, no court judgements or bankruptcy, minimal credit card debt and low limits on your credit accounts. Any credit you have applied for and if you’ve been approved or rejected is also listed, as lenders want to be sure you haven’t made too many credit inquiries in a short space of time.

If you pay your bills on time, this helps create a good impression with lenders and may give you more bargaining power to embark on your property investment dream. For more information about where to begin, contact your local Yellow Brick Road mortgage broker. We’re here to help, from comparing investment loan products and preparing the paperwork to negotiating the rate with the lender on your behalf. Give us a call today.

**The information on this article contains general information and does not take into account your personal objectives, financial situation or needs. If you require further information don’t hesitate to contact the branch directly. 
 

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