Managing your finances well is a crucial, yet often overlooked, component of property investment. Get this right and you’ll minimise risk and improve the security of your property portfolio.
Now you have one or more properties tucked safely under your investment belt, there are three important steps you should take to ensure that:
Your properties are working as hard as they possibly can
Your money is working as hard as it can
You have the right people making this happen
Having a ‘set and forget’ attitude towards your property investments can cause a good property to fail, which is why it’s important to continually review your properties and your finances, to ensure they’re generating optimal returns.
1. Make sure your properties are working as hard as they can
Your rental income is the bread and butter of your asset. It offsets your investment loan and expenses, which is why it’s essential that your property is earning the maximum income that it can.
Therefore, choose your property manager wisely and make sure they keep on top of the market rental price for the property.
Rental appraisals should be conducted annually to determine if the current price is still fair or could reasonably be increased.
You also need to find ways to build equity and generate cash flow through improvements.
The right improvements to a property can manufacture immediate equity, boosting your borrowing power or allowing you to build a greater cash buffer for security during possible downturns.
Simple changes such as interior painting, new benchtops or cupboard facades, or sprucing up front and back yards can instantly raise the value of a property.
Restorations and improvements also allow you to review and potentially increase the rent, immediately boosting your rental yields.
Regularly evaluating your loan financing is also crucial.
Mortgages should be evaluated regularly so you can be sure you’re taking advantage of fluctuating interest rates, deals from lenders, and changes to your circumstances, which may allow you to refinance your loans to a more competitive rate.
A proficient mortgage broker can compare a multitude of lenders to negotiate a better deal that will save you money.
Yes, it can be a lengthy and arduous task to refinance, but it could save you tens of thousands over the life of your loans.
2. Make sure your money is working as hard as it can
First-time investors are often concerned about how they will fare if their property becomes a liability they have to keep afloat.
That’s why it’s important to have a cash buffer in place.
If you’re mortgaged to the eyeballs and the market slumps or a property struggles to find a tenant, do you have the cash to keep you buoyant?
A healthy buffer is a life preserver.
How much buffer do you need?
At the very least, you need enough to cover the shortfall between your mortgage repayments and the rental income for 6 months to a year.
Ideally, you would also have enough to cover a property’s expenses for a year.
Now, how can you use that cash buffer to work for you in the meantime?
Use your buffer and income to offset your own mortgage
You can use all your income, savings and your buffer to reduce interest on your personal home loan, by linking it to a Line of Credit or Offset account.
Your cash is calculated as a repayment on the loan, reducing the overall amount the interest rate applies to.
Because of the way compound interest is calculated, the earlier you can begin offsetting your loan with your income and ‘rainy day’ funds, the less interest you will pay in the future.
3. Make sure you have the right people making it happen
Property investment is a team sport.
And if you’re the smartest person on your team you’re in trouble
Many investors try to manage their finances and tax on their own, but this can lead to missed deductions or miscalculations, if you’re not 100% sure of what you’re doing.
An experienced, property-savvy accountant won’t cost you the earth and they should be able to guide you through the process of claiming all legal deductions, while also keeping on top of each property’s depreciation schedule, which must be drawn up by a Quantity Surveyor.
You need a proficient mortgage broker as well as a property strategist to help with the initial purchase and in annually reviewing your portfolio.
This may lead to you offloading an under-performing asset, which may be hard to swallow, but it’s far better than holding on to a property that drags your financial situation down.
Granted, engaging some of these experts will come at a cost.
But keep in mind that the fees you incur when trying to generate an investment income are generally tax deductible – and smart property investors understand that their advice can be invaluable.
Have you ever wondered what the cost may be of not leveraging the experts around you to your advantage?
Creating a profitable real estate portfolio isn’t all that difficult, provided you’re an active player in managing your affairs.
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