4 rules to consider before investing in any property
In today uncertain time. If you have plans to buy an investment property. It is good to understand the 4 rules of investing principals even before committing to any investment property.
Monitor cash flow and expenses
Cash is king as the saying goes. Tabulate and record all cash flow and expenses incurred for the property on an excel spreadsheet. Cash flow will be rental income collected from renting out the investment property. Expenses included monthly maintenance charges, property tax, minor repairs, furniture, commission to agents, etc. Monitor those numbers closely and check for any deviations or unplanned expenses. Always exercise prudent in managing your investment property.
Have a backup reserves
A good rule of thumb is to have 6 months of monthly mortgage payment in case there are prolong vacancy period. There could be period where the monthly rental is insufficient to cover the monthly mortgage repayment. Such reserve allows you to sleep soundly at night while your investment property generate healthy returns to you.
Expect for contingency
You need to factor in unexpected events such as major repairs, rising interest rate or tenants defaulting. It is a good practice to have addition saving on standby for such expenses. Set aside 2 months of monthly mortgage payment for such contingency.
Do a stress test
This is a “What If” situation. Financial institutions such as banks often stress test on their business to determine their vulnerability. These tests could be scenario where the property remain vacant for a certain period of time, change in rental rates, depress in valuation, etc. These simulation exercise helps you to anticipate those situations even if they occurred and check if you have the financial means to weather them. Use a excel spreadsheet to forecast such scenarios.
If you adopt and practice the above well. You would be pretty safe going through challenging period during the tenure of owning that investment property. Give me a call if you have any doubts.