4 questions to ask yourself before you buy an Investment Property

 In Investing

Buying an investment property is a significant addition to any investment portfolio. Real Estate agents and mortgage brokers are of course keen for you to get into the market. You may have given some thought to how much you can borrow and what your rent might be. But what else should you consider before you take the big step of bidding at auction?

How long have I got?

Time-frame for your investment is very important. There is an old financial adage ‘it’s not timing the market, it’s time in the market’. As investors it is very difficult (and academic research tells us impossible), to reliably buy low and sell high. We may feel that we can see where the market is going but typically trying to time the market is a recipe for losing money. Investment properties are long-term investments, a conservative estimate is a time-frame of at least 15-20 years to ensure you get the capital gain that this type of investment can bring. While ups and downs in the property market aren’t as obvious as ups and downs in the share market they are most definitely real and only a long-term investment horizon can protect against them.

How secure is my cash flow?

Having a base of reliable personal cash flow is important for this type of investment, particularly if you are going to borrow funds, and let’s face it that’s most of us. The bank needs to be paid even if you don’t have tenants and unexpected expenses arise should the hot water system burst. This regular cash-flow could be from your salary, other investments or from your personal cash reserves. What’s important is that you think about the security of that cash flow, how much fat there is in your budget to absorb the unexpected and what back up options you have (eg income protection or cash reserves).

How much do I know about the market?

Property is an interesting investment because every property is different. One good way to educate your self is to get to know your own suburb’s sale and rental markets. This can give you a good basis for assessing value-for-money when the time comes to decide which investment property to buy. Investing in your own suburb also has advantages because you can manage the property yourself, saving on management fees and keeping an eye on the condition of your property on a regular basis.

Whether you are investing in your own suburb or a suburb in another part of town it’s key that you put the time into knowing the ins and outs. While you don’t have to have the knowledge of a registered valuer you should be familiar enough with this suburb that you are able to get a good feel for the asking price of a particular property before seeing the price quoted in the statement of information. Knowing that last month saw 5 properties just like this one within similar price range tells you that this property might be well priced. If you still feel like it’s a mystery each time an asking price or sale result comes up, then ask yourself if you know enough about the market yet to recognise a good deal from a bad one.

Have I got the right advice?

A financial planner, who has the authority to provide advice about investment properties as well as other investments can help you work out if purchasing an investment property is right for you. They can help you to understand the pros and cons of your investment property and how it stacks up against other investment options. They can help you determine whether you should buy it as part of a self-managed super fund or in your own name. They can help you to estimate the impact that rental and repayments will have on your day-to-day living expenses. They will help you balance the rest of your investment portfolio appropriately to match your risk profile and make sure that you have the right sort of protection in place to give your financial affairs the flexibility and security it needs. Financial planners can also look at your overall financial situation and look for gaps and opportunities in the taxation implications for you and your dependents. Finally a financial planner will help you decide if an investment property is the right fit for your personality and the practicalities of your day-to-day life. It’s a big investment, it’s worth getting the right advice.


What next?

If you are wondering where to start, we have a webinar coming up at the end of May ideal for those who want to start thinking about purchasing an investment property down the track. To learn more and book tickets: Webinar: Your First Investment Property.  We’ll be discussing:

  • The pros and cons of owning your own investment property
  • How to know if you are ready to own and investment property
  • How to start planning to buy your first investment property.


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