When it comes to property investing, most people understandably believe it’s all about bricks and mortar. Finding the right asset in a prime location, building a portfolio of appropriate assets, then sitting back while your wealth increases.
And, to some degree, this observation is fair enough. Choosing a great property in a prime location is an essential part of the process.
However, there’s one area that occupies a primary foundation for success but gets short shrift in the discussion.
And that’s finance.
When it come to property investment, financial health is key.
So, what are some of the essential financial concepts you need to understand in order to thrive as an investor?
Successful investment is all about finance
Residential property investment has many unique advantages over other asset classes, but one the biggest has to be the ability to leverage borrowed funds and equity.
You see, unlike shares, a business or even commercial real estate, those who invest in residential property can borrow a larger percentage of their asset’s purchase price. If you only need 80 per cent borrowing, this is ideal so you avoid the dreaded lender’s mortgage insurance (LMI).
But if you do decide to take on LMI, you could potentially borrow up to 95 per cent of the property’s value.
That’s particularly relevant right now. With the official cash rate at 0.1 per cent, and lenders regularly providing sub-2.0 per cent interest rate loans, positively gearing your investment has rarely been easier. Always essential to run the numbers and closely assess the risk with the right professionals.
But there are other important hurdles to clear in order to secure a loan. Since the GFC, lenders have been more rigorous in their borrower assessments, with higher scrutiny of finances, particularly in response to responsible lending legislation.
That means taking steps to maximise your position and improve the chance of borrowing all necessary funds.
Her are my tips for helping get a ‘yes’ on that loan application.
- Do a home budget and stick to it
You must conduct a full and frank assessment of your income and outgoings long before you decide to apply for a loan. If you can cut and trim your costs, ideally while increasing your income, it goes a long way toward a loan approval. Of course, once you do have your home budget in order, it’s essential you stick to it for a time. Most mortgage brokers like to see that their clients have been on a budget for around six months prior to applying for a loan.
2. Use a mortgage broker
Smart investors know this is a no-brainer. Mortgage brokers are guiding-hand professionals who not only help you prepare for a loan application but also source the best borrowing options for you. Mortgage brokers will have access to a variety of loan products from across a number of lenders, and they are adept at matching you up to your most appropriate finance deal. Always work together with licensed and appropriate professionals in their field.
3. Plan out your future
This is not just defining your long-term goals and plotting a path to achieve them (although this is also key). Planning out your future is also about key milestones along life’s journey when financial changes come into play. If you’re planning for kids in a few years, factor that into your considerations. Perhaps you’ll need to extend your loan to cover additions to your home? Similarly, you might be on a professional path to promotion. Allow that your income might rise in a few years as a result. By mapping out your future, you can mitigate much of the stress and risk associated with borrowing, and ensure you stay a step ahead of your finances and loan servicing.
4. Buy assets that fit your financial profile
Purchasing a fantastic capital growth asset in a blue-chip location might seem like a great idea, but if you have to borrow beyond your means to pay for it, then you’re in dangerous territory. If the lender forecloses due to non-payment of loans, all your hard work will go up in smoke. Buy the best investment property you can afford, and make sure the rent it generates is adequate for your needs.
5. Regularly review your finances
Property and finance matters are not set in stone. Regular, fearless assessments of your loans, property portfolio and home budgets are a must to ensure your optimising everything. By regular, I believe most investors should be reviewing their entire position every six months to 12 months at a minimum. That way, you can ensure you have the best possible loan arrangements in place for your investment strategy.
Being property savvy also means being finance smart. By staying up to date with your loans and using them widely, it’s possible to build a formidable property portfolio. Best of all you can reduce risk, maximise outcomes, and sleep soundly and stress free.
Always review any finance with appropriate finance professionals and review property location research and investment analysis data, with a professional, QPIA (PIPA Member) qualified & accredited ASPIRE Property Advisor Network Advisor. Never rely on glossy sales brochures or property marketing information, ensuring a property is right for your strategy. Property Investing is about BUYING a property that matches your goals, never be SOLD an investment & know your numbers!
Visit www.aspirenetwork.com.au or call our office to be connected with a Property Investment Advisor on 1300 710 933.