8 signs that you are ready to invest in property

Here’s 8 signs you know you’re ready to dive into property investing!

If you’ve been thinking about buying an investment property, but not sure if you’re ready, here’s 8 signs that show you’re probably ready to give it a go! Remember to be smart - manage things like a professional, be kind to your tenants who live in and take care of your property, and stick to your strategy.

You know you’re ready to invest in property when:

#1 you have your financial foundations sorted

You need to have your personal financial foundations sorted well before you think about investing in property. If your money management system is a shambles, property investment will just make things more complicated. Glen James shares his sound financial house concept, which shows what makes up a good financial house - check it out and see how your financial house compares. Get your financial foundations ticked off for your life in general, but particularly before you start building a property portfolio.

#2 you know your long term goal & strategy

It’s not enough to just buy a property and hope for the best. Your property purchases, like most things in life, need to be directed by a strategy. You also need to consider how many properties will achieve this goal - just one, or more? Your moves will be tailored to the ultimate picture you’ve painted for your future, so check in and write down your strategy.

There’s a couple of potential strategies to consider:

Capital growth - sometimes called ‘capital appreciation’, capital growth is the increase in market value of the property over time. Example: you buy a property for $500k, over the next 5 years it increases to $700k based on current market value. That $200k increase is the capital growth of that property.
Tax benefits - perhaps there’s a tax benefit to you owning a property (or several)? This could include depreciation, negative gearing, claiming interest on the mortgage, capital gains tax exemptions, and so on. You’ll have your accountant in your corner for this one.
Cash flow - adding cash flow to your life. This will be based around yield - what yield per year are you aiming for? We’ll touch on this soon.
A combination of the above.

You also need to understand things like your purchase price, the type of property, buying entity and location. You want all of these aligning around your strategy - check out John’s 8 property investor fundamentals blog to dig into these more.

#3 you know your risk tolerance

Investing in property involves varying levels of risk - risk relating to things like lending, managing the property and the costs involved in maintaining the property. There’s a number of variables where risk is at play. So do some solid self assessment and get to know how much of this risk you’re willing to handle. Perhaps you need to play things more conservatively, or maybe your appetite for risk is a bit broader and you’re happy to risk a bit more to get the biscuit. Wherever you stand you really need to know yourself, and what you’re willing to handle when it comes to risk.

#4 you understand terms like yield and loan to value ratio (LVR)

These two terms are used consistently in property investing - get familiar with these terms and you’ll be ready to speak “property”:

Yield
Yield, put simply, refers to the financial return you gain from a property minus the costs incurred to acquire and manage it. There’s two ways to understand yield:

Gross yield
Tally up the yearly rent
Divided by purchase price
Multiplied by 100 to get a percentage figure
That’s your gross yield.
Net yield
This is what’s leftover once all your costs are paid.
Tally up property fees and expenses in a year
Tally up the yearly rent
Deduct the fees/expenses from the rent amount
Divided by purchase price
Multiplied by 100 to get a percentage figure
That’s your net yield.

Loan to value ratio (LVR)
Generally speaking the lower the loan to value ratio (LVR) the better. Essentially, it involves comparing the price of a property to the amount of money you would need to borrow to purchase it.

LVR is determined as follows:
The amount you plan to borrow to buy a property (or your current loan amount)
Divided by purchase price
Multiplied by 100 to get a percentage figure.

That’s your LVR.

If your LVR exceeds 80%, many lenders consider it a risk and may require you to pay lenders mortgage insurance (LMI) to protect the lender.

#5 you understand all costs involved

The running costs of a property don’t boil down just to buying the actual property or paying the mortgage & interest. There’s a number of peripheral costs you need to budget for every year. These include:

Any renovation work you want to do now or in the future
Landlords insurance
Mortgage registration fee
Potential interest rate rises
Council rates
Strata/body corporate
Property management
Maintenance
Potentially water rates (although this is shifting a bit)
Vacancy - the cost of keeping the property when you’re in between tenants
Taxes - land, income, capital gains when you sell
Your time in managing paperwork & organising things relating to the property
Potential travel to and from the property if you’ve bought in another location
Stamp duty
Lenders mortgage insurance (LMI)
Reports - depreciation, pest & building, quantity surveyors
Legal fees - your typical conveyancer fees when purchasing

Before you buy an investment property get some quotes to get a sense for what these costs could tally up to - even a ballpark figure in the back of your mind is better than not being prepared for them at all! These costs are things you don’t want to gloss over. Be ready!

#6 you have appropriate cash buffers

This one gets overlooked far too much - you need an emergency fund for your property (or properties). If the hot water unit breaks, some emergency electrical work is needed, an unexpected cost drops in - you need that emergency fund stat. Particularly if it affects your tenant’s ability to live in your property comfortably with running water, flushing toilets, working electricity and the like, you need to have that cash ready to go to step in and get it fixed asap.

#7 you’re taking a broad approach

A mistake some property investors can make is thinking they can only invest in properties they can drive past or are local to them - not the case! Consider properties across the country, not just down the road. Once you know your strategy you have property markets all over the country to consider - if cash flow is what you’re aiming for, maybe buying a property in another state is the best way to achieve that - you won’t know unless you consider it and do your research. Go broad and be prepared to research all property markets out there, aligning the best one to your strategy.

#8 you’re listening to the right people

Your circle of influence is key - who’s affecting the way you think about property investment, and are they the best voices to be listening to? Find the right podcasts (like my millennial property), books, friends and fellow investors to talk through how it’s going, what you’re thinking and any opportunities in front of you. Consider a clarity call with John Pidgeon to chat through your investing strategy! Investing in your education and decision making can bring about amazing returns, so invest into it.