How do you know when you’re financially ready to invest in a property? How much debt can you take on before you put your personal finances at risk? Once you have an investment property, how do you know when it’s time to leverage your equity and expand your portfolio?
If you’re asking yourself one or more of these questions, then you are pursuing your financial goals responsibly. Investors who carefully plan out their finances and only pursue expansion when they’re financially secure will have a much better chance of achieving their goals than investors who throw caution to the wind and move forward without careful analysis.
The only way to know if you’re ready is to create a personal criteria for your unique investment plan. As you review your financial situation, carefully consider the following issues.
Unless you have enough cash to pay for a property, you’ll have to acquire an investment loan and lenders have specific requirements for property investors. In general, lending requirements for investment properties are stricter than requirements for owner-occupied properties.
For instance, lenders usually require at least a 10% deposit on a loan for an investment property and they’re also very careful about your debt ratio. If this is your first rental property, don’t expect lenders to include potential rental income on the property in their calculations for your debt ratio. If you have a proven track record of rental income on other properties, they’re more likely to include it in their calculations.
Because of increased risk assumed by lenders when they fund investment properties, they have to be more stringent. For this reason, you may need to come up with more cash for your first investment property than you will for subsequent properties. This is good news for people who already have investment properties, but it can make the initial investment seem daunting.
In addition to the funds for your deposit or down payment, your lender will likely want to see that you have funds for repairs, marketing and other start-up costs. Contact Altus for more information or a list of your lender requirements.
When you purchase an investment property, you become a business owner, and every business needs a solid plan. Your plan will help you to analyse where you are now and where you want your investments to take you in the future.
Start by defining your goal for investing in property. You’ll approach your business differently if it’s going to be a side pursuit than you will if you want to develop it into a full-time career. Will you hold your property for a long time, or try to make a quick profit by flipping it?
Your business plan should also include considerations such as where you want to invest, what you’ll do with your profits (take them as personal income or reinvest them in the business), and how you will manage the property.
Your business plan will help you to sort out many of the financial questions that you’ll need to answer in order to determine if you’re financially ready to invest. You’ll be better able to predict your cash flow, and you’ll know how much you need to save before you’re ready to jump in.
Coming up with the initial costs associated with property investing can be the biggest hurdle for most investors. Between the deposit on your loan, funds for initial repairs and marketing, stamp duty and = costs, you could be looking at a substantial sum.
If you don’t want to wait until you can save up enough money, consider alternative financing sources. Some property investors sell assets or move into a new personal residence while turning their former residence into an investment property. Some investors purchase a multi-unit property and then live in one of the units. As you can see, creative financing options abound, so explore your options and find a method that will help achieve your goals.
For more information about our lending services, get in touch with us at Altus Financial.