Investment Finance: Can I afford an Investment Property?
If I were to ask you the question. Can you afford to have a multi-million dollar company? I think the almost automatic answer would be Yes! However, if you stopped to think about it there would be some deeper questions to ask. Can I cope with problem employees? Can I deal with the stress of business deals falling over? How will I cope with a much higher income? In a very similar way owning an investment property will cost you money, time and mental/emotional energy. You will need to improve yourself in order to operate at a higher level. Here’s some thoughts…
Owning an Investment Property will cost you Money
Assuming you don’t have the cash to go and buy one, you will need a lender. I could answer the question of whether you can afford an investment property within about 30 minutes. To get a loan we need to satisfy the four C’s of Credit.
Investment Finance : 4 C’s of Credit
Capacity – What is your income? This is the one everyone thinks of first.
Capital – What is the size of your deposit? This can be in cash or equity in a home, a gift or even in the form of a family member going Guarantor. Typically, you will need a minimum 5% deposit plus costs. So to buy a $400,000 property you would need $20,000 deposit plus costs. In NSW one of these costs is Stamp Duty of approximately $13,500, unless the property is brand new.
Collateral – What do you own and what do you owe? If you own a car and have some super and some house contents, you are telling the bank that you have spent your money on something and have something to show for it. If you have some debts, say a credit card and a personal loan it won’t stop you getting a loan but it will decrease the size of it. The more kids you have the less you can borrow! I should know I have 4 kids!
Character – This refers to your credit rating. If you have had credit problems with a telephone company or been made bankrupt or similar it will make it more difficult to qualify for a loan. Not always impossible, but more hurdles will be placed in your way. If you are concerned about your credit history go to Veda and get your report ordered.
Common Sense – I know I said there were only 4 C’s but I have added a 5th one for good measure. The only thing common about common sense is that it isn’t very common. If you are about to have a baby and will be out of work for a while, or have a major operation or are moving to Tibet to become a monk, perhaps you should reconsider the timing of buying an investment property!
Owning an Investment Property will cost you Time
If you are smart you will use a good reputable property manager who will charge 7%-8% of your rent, but will save you hours of time. However, you will still need to make decisions about new tenants, pay the bills, make sure the repayments are made and complete a larger tax return. You will need to find time in your already busy schedule to do this.
Owning an Investment Property will cost you Mental and Emotional Energy
You are going to have to deal with real estate agents, tenants, banks and property managers amongst many others. You are going to have to deal with people. People come in all sorts of shapes and sizes with their personalities and you are guaranteed to have some conflict along the way. How are your conflict management skills? If they are poor there is a good chance that your behaviour will bring you to a place of failure, either by missing a golden opportunity or by messing one up. Improving your people skills is a never ending but immensely important skill across your entire life.
How do you cope with stress? If you own a property for more than a couple of years you are going to have to change tenants. Are you going to lose sleep every night it is vacant? If the process of building your property takes longer because of rain, how will you cope with that? Your capacity to deal with bad news or problems in a level way will count highly in how successful you are in making an investment portfolio of properties.
It’s important to remember that in order to become a successful property investor you will need to grow your skill, your knowledge and your emotional capacity to deal with difficulties. Frank Lowy who owns Westfields didn’t become one of the wealthiest people on earth over night. He has ridden out the highs and lows of the world’s economies of decades and decades.
Article by James Parnwell
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