When it comes to residential property, most people’s opinions on the ‘right’ time to invest are based largely on market conditions. Whilst the state of the market certainly plays a role, changes in factors like interest rates and the ratio of supply to demand are beyond the control of the individual investor.
This is why, if you’re considering buying an investment property, it’s wise to focus on the factors you have some level of control over; in other words, your personal and financial circumstances.
The key to maximising this control is managing risk. Like any asset class, investment property involves a degree of risk. If your personal or financial circumstances change significantly and you haven’t planned for the change, the risk of getting in over your head is higher. Before you invest, it’s important that you’re in a strong enough personal and financial position to ride out an unexpected event like losing your job or contracting a major illness.
“Before you invest, it’s important that you’re in a strong enough personal and financial position to ride out an unexpected event.”
Generally speaking, the least successful property investors are those who haven’t planned adequately for risk, cannot afford to hold the property and are forced to sell before the asset has begun to realise its potential.
Read more: 6 facts to know about property investment
Before you determine whether you’re in a strong enough position to buy an investment property and comfortably shoulder the risk, it’s sensible to seek personalised , expert advice. Meanwhile, here are three of the most important factors to consider:
The best time to invest is during your peak earning years when your income is steady, or preferably, increasing. You should also have a reasonable expectation of earning this income on an ongoing basis for at least seven to 10 years. During this time, you can put any pay packet increases into the property loan to reduce debt rather than merely pay off the interest. This will enable you to further expand your portfolio over the long term.
Before you buy, think ahead to any possible personal commitments you may make over the next seven to 10 years. If you’re likely to experience a drop in income due to maternity leave or self-employment, or higher expenses due to home renovations or school fees, you’ll need to consider how these could affect your ability to meet your loan commitments and other property-related expenses. If things could get tight, it may be best to delay buying an investment property until your income and expenditure is back on a more even keel.
Even if you’re not anticipating any major changes to your circumstances, it’s advisable to consider taking out income protection insurance. Most policies will pay around 75% of your income if you sustain an injury or contract a serious illness that prevents you working for a substantial period of time. Policy premiums are generally tax deductible.
Before you invest, it’s sensible to reduce your non-deductible debt as much as possible. Non-deductible debt is debt you can’t claim against your taxable income, such credit cards, car loans, store cards and the interest on your family home. There’s little point in taking on more debt by way of an investment property, if your current debt levels are already stretching your financial resources.
Only buy an investment property when you’re gearing (borrowing) to a level at which you can comfortably meet repayments even if interest rates go up. There’s no ‘ideal’ gearing level; it depends on your individual financial circumstances and risk tolerance. From the lender’s perspective however, a gearing level higher than 80% is considered a more risky proposition, so the lender will require that you pay mortgage insurance before they approve the loan. Remember to factor in this expense when you’re planning to buy.
In short, there’s little point jumping into an investment when market conditions are more affordable if you don’t have the capacity to hold the asset for the long term and benefit from its full potential. The ‘right’ time to invest is when it’s the right time for you.
“The ‘right’ time to invest is when it’s the right time for you.”
NB: All advice is general, and for guidance only. It is advised to seek professional financial advice, tailored to your personal situation before making any decisions.