5 questions to ask yourself before you buy an investment property

Australia is navigating a pandemic induced recession, property prices have fallen in many locations and interest rates are at record lows. Naturally, you may be asking yourself, ‘Should I be investing in the property market?’.

Everyone has different reasons for getting into the market, such as wanting to reduce your tax or because friends and family are doing the same. But, these shouldn’t be the primary reasons for investing in property.

Before you dive in, it's important to take a step back and objectively consider your position.

As a mum of a three-year-old, I understand how it feels to have a growing family and the pressure to provide for them now and into the future. That’s why my primary goal is to collaborate with my clients to make a difference in their lives so they can live the life they want and achieve their life goals.

Having worked as a financial adviser for almost five years, a big part of my job is to help simplify the process as, more often than not, clients will come in a little mystified and unsure where to start.

So, if you are thinking about a property investment, here are my top five questions to ask before you dive in:

1. Can you take the emotion out of the decision and come back to investment objectives?

Investing is inherently an emotional discussion, bringing on feelings from fear to excitement, especially when it involves our friends or family. Nervousness around property affordability, as well as understanding all the potential financial implications can be overwhelming.

While friends and family are great to offer support during large financial decisions, you should look to professionals to give you solid and strategic investment advice, as they can objectively weigh up the pros and cons for your specific circumstance.

It’s important to find a financial adviser, who will take the time to get to know you and your unique needs.

2. What are your financial goals and how will property help you achieve them?

I always ask this question because you need to have an overall picture of how the property will fit into your financial goals and whether you are wanting the investment to generate income or growth (i.e. short term or long term).

For some people, they may be hoping to create passive income to help them cover their day to day living expenses through renting out a property. For others, the goal is more about long term growth. Or maybe it’s about building their portfolio for retirement and the next generation.

Once your financial position is established you can set realistic goals and create an investment strategy, as well as scenario planning.

3. What is the state of your cash flow?

Although you may have enough for the deposit on a property you also need to consider other costs that will pop up along the way, which is where cash flow comes into the picture. Property is an illiquid asset which means the equity is difficult to access quickly.

How much of your day to day expenses are you willing to sacrifice to service a loan on an investment property? Have you taken into account the cost of different insurance? If you couldn’t find a tenant or you had to reduce the rent - would you still be able to meet your day to day living expenses?

In 2020, many of my clients lost their tenants which put their cash flow under major strain, causing stress for them and their families. So digging deep and asking the tough questions upfront can mitigate added stress down the line.

4. What’s your Plan B if something goes wrong?

This is a tough question because everyone’s situation is different however you need to ask yourself - if your circumstances changed unexpectedly due to an injury, illness or job loss would you be able to make up the shortfall? Do you have protections in place like insurance to ensure you can keep up with the loan repayments?

Alternatively, you may look to set up a separate investment portfolio to help meet your cash flow needs if something unexpected was to happen to cover any shortfalls in your cash flow.

5. Have you done your research?

Before you make ANY investment you need to do your research.

Sometimes you don’t know what you don’t know until you get into the weeds. If you believe property is the right investment choice for you and you already have a particular property in mind, it’s important to understand the suburb, average house prices in the area and the state of the property.

By Michelle Li.

Disclaimer: Michelle Li is an ANZ Senior Financial Adviser. ANZ Financial Advisers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522, holder of an Australian Financial Services licence

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