7-Step Financial Planning for Property Investment

Property investing can be an incredibly lucrative means to create wealth in Australia. 

But not everyone makes a lot of money when it comes to property investing – so what separates the success stories, from the failed ventures?

Of course, there’s a lot involved in succeeding as an investor. But failing to properly plan prior to buying is a big one – failing to plan is planning to fail!

And financial planning for property investment – ensuring you have the right finances to fund your property investing aspirations – is easily the most important. 

You can have an airtight property investment plan for every other aspect of investing, but if you don’t actually have the finances to purchase and support the specifics of your strategy, then you’re only wasting your own time and resources.

So let’s take a deep dive into financial planning for real estate investors, with some invaluable pointers that will ensure your investment property strategy is giving you the best chance at success.

1. Have Your Deposit Saved And Ready To Go

One of the big requirements for investing in property, and often a barrier for many looking to enter into the industry, is having a deposit of around 15-20% of the purchase price.

You can invest with a smaller deposit, but this will usually incur additional costs in the form of Lenders Mortgage Insurance (LMI). 

Some of the best ways to quickly save a deposit include:

• Use existing home equity – this relies on you having equity in an existing property or a relative that is willing to use equity in their own home.
• Savings: the most direct and common way to save for a deposit is by simply saving the amount through a 9-5.
• Self managed superfund: this involves using your super accumulated over a number of years and put it towards a deposit. 
• Gifts or inheritance: some people may be lucky enough to have their parents gift or leave them a lump sum as inheritance.

Saving a deposit is obviously key in knowing how to finance an investment property. But you also have to have your finances in order as a means of showing the bank that you are capable of servicing an investment loan. 

2. Stable Circumstances

Lenders will look at a range of factors to determine whether you are capable of making repayments on your mortgage.

You need to show the banks that you are a stable investment. 

Demonstrating to the banks a record of Stable employment and living arrangements can really go a long way.

Lots of different jobs and change of address within a year, and periods of unemployment won’t really shown that you’re reliable and in a position to make repayments.

So even if you’re only just starting to think about financing an investment property, it may be worth thinking about how some choices will affect your borrowing ability.

Focus on building a stable track record!

3. Pay debts on Time

While having debt isn’t the end of the world when it comes to borrowing, it is important to have a history of making repayments on time.

This can include small bills, like phone, internet or rent. It may not seem like a big deal at the time, but having a track record of missing due dates or outstanding repayments can be a real disadvantage.

Lenders need to know that you’re someone who can make repayments on time and aren’t too much of a risk when it comes to paying off the mortgage. 

4. Think Twice Before Making ‘red flag’ Purchases

Banks will also look at what you’re spending money on. 

For example, they might look at particular spending habits, such as multiple trips to the Casino, liquor store or even something small like cigarettes.

These ‘red flag’ purchases can be done every once in a while, but just be aware that banks will look at higher than usual expenditure on purchases they consider an indicator of risk.

5. Be Sensible With Living Expenses

It’s also a good idea to generally avoid major living expenses in the lead up to trying to secure a loan (particularly in the 90-day period prior to borrowing). 

As mentioned, when it comes to real estate investing for beginners, lenders will look at the big-picture to determine serviceability.

6. Get Rid Of As Much Debt As You Can

Having certain types of debt can reduce your borrowing capacity.

This can include credit card balances, cars or other personal loans, as well as ‘buy now, pay later’ or ‘after pay’ arrangements. 

So it might be worth taking stock of all these debts and seeing what can be paid off before approaching the bank for a loan.

7. Plan Your Cash Flow Management

It’s a good idea to have a thorough understanding of the cash you have coming in, and any regular expenses in order to determine whether you can actually support this mortgage and other necessary life expenses.

Think about what might happen in the worst case scenario: will you have enough cash flow to make repayments if interest rates go up? What about if tenants leave and the property is vacant for a period – will you have enough coming in without their rental income to make repayments?

Owning property is a fantastic way to achieve financial freedom, but it can also put plenty of stress on your life if not planned properly.

Check out this video for tips on property investment update:

The bottom line…

While you don’t have to be an expert real estate financial planner, it’s a good idea to take some time to make sure your finances are in order before investing.

Consider your debt, cash flow, upcoming purchases and regular habits. Once these are in check, you’ll be in a better position to start your journey towards financial freedom.