A successful property investment strategy requires careful planning and preparation, and this sometimes means planning for the unexpected. Whilst the long-term benefits of property investment should far outweigh short-term costs, property investors are sometimes faced with unplanned situations that impact their immediate cash flow, which is why smart investors will always set aside a cash buffer to cover unexpected expenses.
If you own multiple investment properties, in particular, saving up an emergency buffer is a vital step in ensuring your investment portfolio remains protected through changes in cash flow or income, and could ultimately mean the difference between leading a comfortable investment journey and being stretched beyond your financial limits.
Why do you need a cash buffer?
Cash buffers are crucial to investors for a number of reasons. Even if your investment property is positively geared, there’s always the possibility your cash flow situation could change should your tenants decide to vacate or unexpected costs arise. In these cases, a property investment buffer will ensure you can continue to make your mortgage repayments and cover additional advertising costs until a replacement tenant is found. This emergency buffer will also serve as a contingency plan should you be faced with repairs that aren’t factored into your ongoing maintenance expenses such as broken hot water systems or water leaks.
In addition to a property investment buffer, you should also aim to set aside a personal income buffer to cover you through changes of income or loss of salary. This will ensure you can continue to make repayments in cases such as loss of employment or loss of income due to extended illness. Failure to plan ahead for these unexpected expenses can put investors under substantial financial pressure, and in some cases lead to serious consequences such as forced sales.
How much cash buffer do you need?
As a guide, you should look to have two to four months of rental income on hand as a property investment buffer, as well as two to four months of personal income set aside as a personal income buffer.
However, this will also depend on individual factors such as your job security, your risk profile, and the age of your investment property. Older properties, for example, will often require more maintenance, and may therefore justify a higher cash buffer. This is ideally something you should be factoring into your initial investment decision, which is why it’s important to speak to an experienced property buyer’s agent to ensure you’re not purchasing a property outside of your means and financial capacity.
If possible, your cash buffer should be held in an offset account against your mortgage, as this will help you reduce the amount of principal on your loan (and hence the interest charged) whilst the buffer isn’t in use. If you have multiple investments but still have debt in your own home, it’s better to set this account up against your owner-occupier property as the interest repayments on this are non-tax-deductible.
Making smart investment decisions
Whilst the risk of unexpected expenses can never be fully mitigated, property investors can deal with this risk by planning ahead and making smarter investment decisions. As well as setting aside an emergency buffer, this means having the right professionals on hand to manage your property and take care of situations that put your rental income at risk. Most importantly, however, it means making the right decision when selecting a suitable property in the first place.
If you are purchasing an investment property or looking to expand your current portfolio and would like to speak to a professional property advisor about your investment needs, book an obligation-free consultation with one of our Perth buyer’s agents today.