What is your Financial Capacity and Risk Profile?
There are some good deals available for investment properties around the country as prices plateau or fall and rents soar. A number of Aussies are therefore thinking about becoming property investors for the first time.
If that sounds like you, there are a couple of things you need to think about before worrying about yield, vacancy rates and capital growth.
You need to form a strategy first, which involves asking yourself some questions about your goals and taking the time to understand both your financial capacity and risk profile.
What’s my financial capacity?
Let’s start with the nitty gritty. You may have big plans in your head, but there is only so much your financial situation will allow you to achieve…at least initially.
If you are going to need to borrow money to invest in property, a bank will see you as a set of numbers. To a lender, you ARE your financial situation.
What are your income and expenses? What assets do you own? How much debt do you have? Is it good debt (like an income producing asset)? Or is it bad debt (like a cash sucking high interest rate credit card)? What is your credit score? What are your spending habits like? Do you have evidence of saving ability?
Things have changed quickly for a lot of people’s financial capacities in a short amount of time thanks to interest rate rises. In general, most borrowers can now only access about 75% of what they may have been able to get one year ago. That’s a serious fall in borrowing power!
What’s my risk profile?
Minimising risk is an important part of the investment journey, but some people are prepared to take on more than others in the first place.
Your appetite for risk is basically the amount of risk you want and can handle when investing.
Higher risk can mean higher return, but it can also mean much greater losses suffered than those with a conservative approach….and much greater stress too. Certain outcomes can be out of some peoples’ reach because they are simply not equipped to deal with that associated stress. The last thing you want is for your investment success to cost you your relationships, livelihood or general enjoyment of life.
So ask yourself how much risk you want and how much risk you can afford. If things go bad, are you equipped to deal with it?
If you’d like to build wealth over time for your family and future generations, a lower risk investment structure will be good for you. If you want to put it all on the line for a huge return and early retirement, and aren’t afraid of losing it all and starting again, you’re on a totally different page.
What’s my strategy?
Now that you have engaged with your financial capacity and risk profile, it’s time to come up with a strategy. You might want to buy 20 properties in 10 years. Or just one property every 10 years.
When coming up with your strategy, it’s important to settle on what your goals actually are. Having a loose plan just to make money from property makes it difficult to take certain actions at certain times. But if you have an exact plan…say you want to retire in 10 years with a passive income of $200,000 a year, you can work out mathematically how much you need to invest; in which types of markets and geographical locations; how much you need to charge for rent; at what intervals you need to increase rent; at what points it might actually be beneficial to sell an asset in order to pay down a lot of debt on another one, or leverage into an opportunity with more upside; and so on.
I don’t have the know-how
One place with decades of knowledge learned from experience is B.Invested. Founder Nathan Birch has more than 200 properties and has had just about every investment experience you can imagine. By surrounding yourself with the right team of professionals, you are much more likely to achieve your goals. And you might even find there are some opportunities available to you that you didn’t know existed.