Q:I bought my first investment property last month and I’m already starting to get worried about being able to keep it for 7–10 years. I did all the calculations, and with the current tenant I’m cash flow neutral. However, I still feel vulnerable with all this talk of further interest rate increases. I have a variable loan, paying interest only at the moment. Is there anything I should be doing now to make sure I can hold on to my property? Fixed loans seem to be going up every time I check.
A:This should be an exciting time dominated by self satisfaction and a real sense of achievement and is often the most important step on a wonderful journey to financial freedom. Instead, you have allowed unhealthy fear and self doubt to cloud your vision and a well thought out investment decision. Remember that worry has never solved a problem.
Let’s focus on the positive. You’ve already done much of the hard work. You’ve successfully selected a property, survived the negotiation stage, efficiently crunched the numbers, secured your finances, and have a tenant in place already. And in my view, a neutral cash flow is a pretty good place to start.
I am a passionate advocate of long-term investment, reluctant to sacrifice increasing rental returns and capital growth, but you seem intent on the idea that you must hold on to your investment for a 7-10 year period. This timeframe reflects historical investment cycles and within these cycles are smaller bursts and opportunities for profit. It often comes down to your own personal situation and the timing and value of the deal itself.
Perhaps I can suggest a different approach. So much can be accomplished by a change in mindset. In fact, you can make big in-roads into your debt by increasing your payments over and above your contractual obligations. Self discipline, tight budget constraints, longer work hours, a part-time job or just increasing your skill levels to secure higher returns in the market place can significantly alter your financial situation. At the same time you can do so many things to improve the value of the investment property itself. Simple painting, gardening, cleaning and general maintenance will rejuvenate the property, and larger projects such as added rooms, verandas and carports can massively increase your property’s worth. You need to be dynamic and not allow the investment process to stagnate at purchase. Your strategy must be ongoing, underpinned by the desire to influence your investment potential as much as you can.
In your case, I believe your loan structure should really reflect and support your current emotional and financial situation. In many respects, piece of mind is every bit as important as a saved dollar. Fixed loans will guarantee your monthly repayments. Obviously, higher costs, exit and new loan establishment fees must be factored in. I strongly recommend that you seek professional advice as there may be a combination of a fixed and variable loan that suits your circumstances. My own view is that current fixed interest rates are still sound when judged from a historical perspective, but this type of loan can be restrictive and really only suits certain individuals. And remember that redraw and offset facilities and the ability to make extra payments must be part of any loan type.
Sometimes things can appear to be overwhelming at the start. Really, you are in a sound position. Eventually you will gain equity in your property, which will in itself generate financial security and provide access to more funds. The process will soon gather its own momentum. Understand that, in many ways, you are the catalyst for this momentum.
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