10 Oct Borrowing Money for an Investment Property
Regardless of whether you’ve purchased a home before, the prospect of going deeper into debt to fund another property can be an intimidating one. Often, we look at purchasing an investment property in the same way we do any other purchase – as a transaction exchanging money for goods and services.
However, purchasing an investment property is significantly more complicated and the formula is less about spending money than it is about optimising existing resources.
If you look at your finances, including your available cash, the equity you have in your home and any existing investments you have, you will be able to come up with a figure – these are your available and potential resources.
Now, you can effectively evaluate how you are allocating those resources.
Is your cash invested effectively?
Is the equity in your home yielding any leveraged return?
Is the money allocated to your existing investments paying off?
When you adjust your thinking to defining available money as a resource to be invested, you put yourself in a position where you can be critical of your existing and potential investments. You can look at your available cash reserves and consider whether they are a sensible safety resource, or a poorly allocated potential investment.
The same is true of your borrowing potential. Of course, when deciding to enter into any investment that involves borrowing, you should consider your cash flow first – can you effectively service the loan? If the answer is yes, then you may have latent resources available to you outside of your existing reserves.
Optimising (not maximising) your borrowings, involves evaluating whether you are better off leaving those resources where they are or investing them. Neither answer is wrong of course, but doing nothing is as much a decision as doing something.
Look forward five years. Will you regret investing that money, or will you wish that you had? Will you have slept well knowing that your wealth is growing, all would you have lost sleep?
Investing isn’t for everyone, and there are implications for every action you make, including a lack of action. The main thing is to make sure you are making a decision one way or the other.
The Belouis Group