Buying an investment property sounds like a relatively simple plan.

How do you know when you’re actually ready to invest?

Experts say there are some key things you should have in place before you consider yourself ready to make the leap.

You’ve Got Good Equity

Jarrod McCabe, Wakelin Property Advisory associate director, says having a good level of equity built up in your home may mean you’re able to buy an investment property.

McCabe says, “Look at the amount of equity that perhaps you’ve got in your current home.”

“If you’re at a point where you’re fairly comfortable with making your mortgage repayments and you’ve built up a fair amount of equity, you can perhaps then utilise that to open yourself up to the investment market.”

You’re Cashed Up

You could also be ready to dive into the market if you have a solid amount of surplus cash.

McCabe says a good, entry-level investment-grade property will cost you around $500,000, and with banks currently tightening their purse strings, you may need about $100,000 in cash or equity before you’ll be able to borrow the rest.

He says, “In the current market you really typically need close to 20% in cash savings or equity built up – of whatever you’re looking to borrow – because it’s becoming harder and harder to get borrowings in excess of that.”

“We indicate that the property needs to be around $500,000 as an entry point to get a good quality investment, otherwise you’d be compromising on the type of property that you could potentially buy.”

Your Numbers Stack Up

You need to ensure you have done your research, including research on the property market you want to buy into and your own financial situation.

You’ll know if you’re ready to invest once you deeply understand your finances. You’ll need to make yourself attractive to the banks. We’re currently we’re in a credit squeeze, referring to APRA’s restrictions on the banks means they’re tightening the screws and making it much harder for investors to get loans.

The things you need to think about are: How steady is your employment? What are your living arrangements – are they stable? Have I got any bad loans or bad credit debt?

It is also essential you have a deep understanding of what the costs associated with your investment will be. It’s not just knowing what sort of mortgage repayments you’re going to have to make, but also understanding some of the other costs that will be associated with it.

You should consider what the negative gearing benefits are that you’ll get out of the property and what costs you’ll need to take into account. You may have to pay building insurance if you’re purchasing a house or owner’s corporation fees if it’s an apartment.

McCabe suggests basing your loan calculations on an interest rate that’s around 2% higher than the current rate, to provide a good guide as to whether you can afford to invest.

You’re Prepared to be Patient

The experts believe you’re only ready to be an investor once you’re ready to commit yourself to the long haul.

Most property investors aren’t prepared to give their investment the time it needs. 50% of people who get into real estate as an investment sell up within the first five years.

“Most people never get the financial independence they expect because they don’t build a big enough asset base.”

McCabe believes investing in a property should be at least a long-term investment strategy, around 10-years. He says, “It’s an expensive exercise, both from a purchasing and a selling perspective, and you have to take all of those costs into account. If you don’t give it a 10-year period, then you’re not giving the property a good opportunity to perform.”

 

Read more: Realestate.com.au