The 7 signs you may not be ready to buy an investment

Information verified correct on October 22nd, 2016

Are you ready to buy an investment property?

7 signs you may not be ready to invest in propertyInvesting in property can be a good way to generate wealth and ensure a secure financial future. However, just because there are many potential benefits you could enjoy, that doesn’t necessarily mean that investing in property will be the right financial approach for you.

There are several factors that can have a bearing on whether or not the time is ripe for you to invest, so it’s important to carefully consider your situation before making any decisions.

Let’s take a look at some of the warning signs that may indicate you’re not ready to buy an investment property, as well as the steps you can take to help you make an informed financial decision.

Top 7 warning signs that you’re not ready to buy an investment property

1. You don’t have a plan

signs you're not ready to invest in propertyUnfortunately, many first-time property investors around Australia have fallen into the trap of diving headfirst into property investing before taking the time to understand what’s involved. This can lead to them buying the wrong property, borrowing more than they can afford, choosing the wrong home loan, or buying or selling a property at the wrong time. The end result can be severe financial consequences, not to mention a significant amount of stress and wasted time.

So before you buy a property, sit down and work out a detailed investment plan: what financial goals do you want to achieve, when do you want to achieve them and how will you make them a reality?

Speak to a trusted accountant, mortgage broker or property investing strategist to help you decipher your investment strategy.

2. You haven’t done your research

signs you're not ready to invest in propertySelecting an investment property is a complicated task and there’s a lot more you need to take into account than just location. Before you choose an investment property, it’s essential to research the property market so that you can make an informed decision about your purchase.

You’ll need to consider comparable sales prices in your target area, demographics of tenants, the types of property that are in demand in the area, and the type of public services and amenities on offer. Next, look at the potential for capital growth, average rental income, vacancy rates for rental properties and how much it will cost to maintain your property.

From suburb profile reports to property data and real estate listings, there’s an array of useful information available. Chatting with a trusted buyer’s agent can also help you access a wealth of useful knowledge.

3. You’re not aware of the risks

signs you're not ready to invest in propertyThere seems to be a misconception that investing in property guarantees success, but this is not always the case. While prices can rise substantially in the space of 12 months, they can also fall markedly in short periods. Alternatively, they may stagnate for years on end, which can be frustrating as you wait in hope for the market to pick up.

It’s worth pointing out that the property market as a whole can be split into various sub-markets – while property prices across a whole city might be trending upwards, that doesn’t mean prices in your chosen location are heading in the same direction.

If you automatically assume that buying an investment property will make you money, without taking measures to minimise your risk, chances are you’re not ready to invest. You should ensure that you have a contingency buffer of funds to prepare for a ‘rainy day’ or for unexpected costs. Generally, you should keep $10,000 - $15,000 in an offset account.

4. Your goals are unrealistic

signs you're not ready to invest in propertyIt’s important to be realistic about the growth in capital you expect an investment property to generate, and the length of time during which that growth will occur. In the majority of cases, property investment provides a medium- or long-term investment option rather than a chance to turn a quick profit.

Be realistic when working out your investment goals and you’ll have a much better chance of success.

5. You don’t know what it takes to own an investment property

signs you're not ready to invest in propertyAnother mistake many first-time investors make is failing to grasp what is involved in owning an investment property. Unlike some other assets which don’t require ongoing attention, an investment property needs regular maintenance. There are tenants to be found, rent to be chased, repairs to be done and regular maintenance to take care of. Depending on your circumstances, you may wish to do this yourself or hire a professional property manager.

There are the responsibilities of being a landlord to consider, including potential legal issues, plus the need to have adequate insurance cover in place. Buying or selling an investment property can also have significant tax implications when it comes to capital gains tax, so it’s important to be aware of a range of issues before you exchange contracts to buy a property.

6. You don’t understand investment lingo

signs you're not ready to invest in propertyIf you’re planning on investing in property, a concept you’ll need to wrap your head around is negative gearing. Basically, if the cost of purchasing and maintain your investment is more than the income it generates, the resulting investment loss can be used to offset your income and let you pay less tax.

In certain situations, negative gearing can form an important part of your investment strategy by allowing you to reduce your taxable income in the short term while at the same time taking advantage of a long-term capital gain. However, surviving an investment loss isn’t an easy thing to do for some investors, and there’s always risk attached if your investment property isn’t generating enough income and you can’t meet the repayments on your investment mortgage.

If you’re going to invest in property, make sure you’re aware of the potential risks and benefits of negative gearing and what they mean for you.

7. You’re afraid to ask for help

signs you're not ready to invest in propertyNo matter what type of investing you’re planning on getting involved with, one of the biggest mistakes you can make is assuming that you know everything. As the points above clearly demonstrate, property investing isn’t something you should just waltz into unprepared. There are plenty of obstacles to overcome, so the more knowledge you have at your disposal the better your chances of success.

You should always consider asking for expert advice on any aspect of the property investment process. Do you need help choosing the right investment loan? Ask a mortgage broker for assistance. Are you having trouble finding the right investment property? An experienced buyer’s agent can help. Are the taxation and other financial implications of investing making your head spin? Your accountant or financial adviser can offer the support you need.

If you’re willing to ask for advice from people who know more than you, it can only increase your chances of making the right investment decisions.

How to prepare yourself to buy an investment property

  • Get your finances in order. Before you consider purchasing an investment property, make sure you’re in a strong and secure financial position. Is your mortgage paid off? Do you have any credit card debt or car loans to pay off? Will you have enough income to manage repayments on an investment loan? Once you have a steady financial base you can look to generate further wealth.
  • Research the ins and outs of investing. Property investing is far more complicated than many people think. From economic factors to the individual property you select, there are a wide range of factors to consider before you decide whether investing in property is the right approach.
  • Research the property market. Research the performance of the property market in any areas where you are thinking of buying. Which way is the market trending? Are there any factors that will affect property prices in the area in the future, for example interest rate rises or infrastructure developments?
  • Develop an investment plan. Create a considered and realistic plan about what you want to achieve by investing in property. Establishing your financial goals and an investment time frame will help you work out what you need to do to achieve investment success.
  • Choose carefully. As tempting as it can be to just rush in headfirst and buy the first halfway-suitable property you find, be patient. Buying an investment property is a huge decision, so you need to do your due diligence and be sure the property you buy is reasonably priced, has all the features you want and has all the potential required to represent a sound investment.
  • Ask for help. From buyer’s agents and mortgage brokers to accountants, financial advisers and other investment experts, there are plenty of professionals who can help you make better investment decisions. Use their knowledge to build an investment property portfolio that delivers the results you want.
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