NOW is a great time to think about property investment.
The holidays are over, everyone’s back at school or work, and the credit card debt has been eliminated after your Christmas binge. Well, two out of three ain’t bad. However, a stubborn credit card balance shouldn’t stop you from thinking about real estate investing. Anyone who says you should pay of all your debts before starting to invest is a goose.
While having no debt can be a sign of good money management, in business and investing it is also a sign of being too conservative. Instead of debt, the most important word for new property investors is equity. If you have enough equity in your own home or other assets, and enough income to cover unexpected costs and rental shortfalls, you don’t need a cent to buy an investment property.
A $500,000 home with a $350,000 mortgage means there is $150,000 of equity. A chunk of that can serve as an investment property deposit, and as long as property prices rise (which is a bit iffy at times) you become an investment winner.
So how do you get started?
Have a written investment plan for this year and beyond, and make some conservative growth projections using a groovy spreadsheet or similar. However, don’t worry if your projections turn out wrong — anyone who’s been through our real estate market or share market over the past decade will understand their frustrating volatility. Carolyn Parrella, executive manager of landlord insurer Terri Scheer Insurance, says be specific with your plan.
“You may have a particular goal in mind in terms of a profit, negative gearing target or the purchase of an inner-city apartment,” she says. “Map out a month-by-month or annual action plan. Go online and read up on market trends, investment reports and real estate data as this may help shape your strategy.
“Consider including your capital growth and rental income strategy and how you plan to manage finances. If necessary, seek professional advice.” A key rule of real estate investment is to never pump extra money into paying down the property debt if you have any sort of personal debt.
That’s because people get tax deductions for investment debt, but not for personal debt. Only wipe out tax-deductible debt when all other debt, including the mortgage on your own home, is gone. Interest rates are heading lower but that won’t always be the case, so when crunching the numbers factor in a 1 or 2 per cent higher rate on your investment loan to make sure you can handle future rate rises.
If you have credit card debt, crush it as soon as possible because its high interest rate could be costing you a fortune. But don’t let a few personal spending excesses over the holiday period stop you from thinking about long-term investment in real estate.