Question: My wife and I just purchased our first investment property. We purchased the unit for $380,000 and we borrowed $304,000. Now I believe we have enough equity to look ahead to purchase another property. We also have around $20,000 extra cash. What would be the best advice for us to take?
Answer: Congratulations, David! One down and it sounds like more to come. This question is a really good one, and one that every investor should ask themselves as they roll out their property investment plan. Often when I have completed a property presentation at an expo or to any group of people, I get several coming up to me afterwards and asking what I think they should do next. My first reply is: So what is your end-game plan? What is your passive income target or overall wealth target? At what age are you looking to retire? When have you forecast that your debt will be paid down?
Obviously, by the looks on their faces, they haven’t really thought about or looked too deeply into this; instead they think that, as an experienced property investment advisor,
I should quickly be able to tell them, “Just buy a ... ”. It’s just not that simple, and if it was, everybody would be wealthy from investing in property – but they’re not. Some people even lose money or get very ordinary returns. By getting bad or even basic advice they potentially miss out on other, more lucrative investment returns. So, David, my best advice for you is that you need to develop a property investment plan. You need to work out what you want out of property investing. And your answer shouldn’t be as simplistic as “make as much money as I can”.
Investing in property is like being in a small business, but not just any small business, as we all have heard the stats that three out of five small businesses generally fail, most because they took a simplistic view of their business – make as much money as I can. You will find that the vast majority of successful small businesses made it because they had a solid plan.
Here are some tips for what your plan should consider, in addition to the questions I posed earlier:
- You need a sound understanding of what income you currently require in order to meet your living and investment needs, and you should also consider what might impact on this income in the coming years, such as starting a family (eg there is often no financial reward in buying a property for a short period of time and then being forced to sell because you go down to one wage after having a baby)
- You need to understand if there are likely to be any future increases to household spending that will impact on your current existing surplus income (eg big-ticket items like private-school fees, car changeovers, planned renovations, etc)
- You have to decide what minimum investment returns you need for your plan to work, ie will 7% compounding capital growth and 4% rental yield for your next purchase keep you on track? And for your next property – will this be more focused on higher-yield returns to help you pay down your overall debt?
All this is going to require some work, but the rewards will justify the effort. You may want to get some professional help from a Qualified Property Investment Advisor or a member of Property Investment Professionals of Australia. Making more informed decisions means making smarter decisions, and working out what your end game is will help make the next investment decision easier.
Ben Kingsley is the founding director and CEO of Empower Wealth. - He is a Qualified Property Investment Advisor and property analyst and the chair of Property Investment Professionals of Australia. He holds a Cert IV in mortgage finance and is a licensed estate agent.
Disclaimer: The views provided are of a general nature and should be considered as general information only. This is not financial advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.
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