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If you are reading this post it’s assumed that you have read several of my previous posts relating to property investment. This being the case you will know: 2 of the Most Important Formulae for Assessing a Property Investment, and Where to Look for Property Investment Deals.

This article is my advice for individuals looking to purchase a property with a bank loan, with the purposes of renting it out.

I should also reemphasise that in this article it is taken for granted that your credit is good and that your bank is willing to extend credit to you to build your property portfolio.

Now that all of this is in place we need to make sure that you are ready to play in a smart way.

Have Enough Savings

A lot of my clients tend to grow excited once we talk about the prospect of property investing and are sometimes inclined to want to forgo building up the standard elements of a financial portfolio that precede property investment. Saving is probably more unexciting to me than it is to anybody else in the world but property investing simply cannot be done in a prudential manner without having this in place. Firstly, for reasons discussed in previous posts (see links) each property you hope to buy must have a three-prong savings element that precedes it:

• You need to assume that you will be asked to pay a deposit
• You need to set aside funds in case there may be repair work that may need to be done before your tenant moves in
• You need to have money set aside for vacancy and repairs during the occupancy of your tenant

1. Assume That You Will Be Asked to Pay a Deposit

For estate planning purposes and tax purposes primary residences (properties occupied by their owners) and secondary residences (properties not occupied by their owners) are looked at differently. The situation is similar with the banks.

Once the bank becomes aware that you do not intend to live in the property that you are trying to purchase they view the property as an investment property and will as such most likely ask you to participate in the risk by paying a deposit.

If your credit is decent, this amount will usually be about 20%. This is purely at the discretion of the banks and some clients may be asked to contribute less while others may be asked to contribute more.

How much should you set aside? My rule of thumb would be 20% of the value of the property. This is also helpful as it will create a greater disparity between income and expenses as you will be borrowing less, thus making it easier for your investment property to be cash flow positive at inception stage, a crucial element to adhere to as a cardinal investment rule should you want to scale your portfolio quickly.

2. Set Aside Funds For Repair Work Needed Before Occupancy 

The investment gems that you may find should you follow the criteria that I spoke about in previous posts may not always be in pristine condition. You need to plan for this.

This being said, you also need to be careful not to overspend in this regard. Too many times I have seen people spending money on an investment property that they will not get a return on once the property has been occupied.

Keep it simple. Keep your emotions out of it. Do not speculate about property value and appreciation due to the work you do on the property, but focus instead on getting it to a place where tenants would readily occupy the property. Take note of the area that the property is in and guard against creating a white elephant. Beautiful and expensive finishes should be reserved for properties that you live in. Functional and reasonably priced finishes are what is suitable for an investment property.

How much should you set aside? My ballpark figure would be 3 times the market-related monthly rental value of the property.

3. Anticipate Vacancy and Repair Work

We live in the real world and life barely ever works out the way we hope it will when we create our spreadsheets. Vacancies are a real thing. The results of vacancies will hit you harder at the beginning than they will once you are more established.

If you own one investment property and one of your properties is vacant there will be a 100% shortfall in your projected monthly income. If you own ten investment properties and one of your properties is vacant there will be a 10% shortfall in your income. The bigger you grow your portfolio the more your general exposure to income risk begins to wane. But as you begin to own property you also begin to own the repairs that go with property ownership. Water heaters (geysers) burst, plumbing fails, electrical wiring may not last you a lifetime. These are all things that happen in the real world so just anticipate it.

How much should you set aside for this? My ballpark figure would be 6 times market related monthly rental.

But Wait, There’s Good News

Up to this point, I have not spoken about taxes. Before I do, I would like to emphasise that you take this only as advice and consult with your CPA for accurate information that suits your particular set of circumstances.

You can legally write off your tax expenses and the IRS will make you a very happy investor. Here is a list of some of the most common potential property expenses you can use as tax write-offs:

• Property Maintenance Expenses
• Property Management Fees
• Property Rates & Taxes
• Property Finance Interest Fees
• Miscellaneous Costs You Incur Relating to Sustaining Your Portfolio

Added to the above, you can also write-off on paper depreciation over a 27.5 lifespan (check with your CPA for the rate in your state or country)

Using this knowledge about how the receiver assesses property investments can get you to represent an on paper loss even though you were profitable and were cash flow positive from your property portfolio. You can use these strategies to shield your income from tax liability and thus enjoy thicker profit margins.

In Conclusion

The great advantage of having these expenses saved up for in advance is that you can enjoy more of your portfolio income as profit knowing that you have already hedged against unforeseen eventualities.

With this being the case I recommend that you set aside 10% of your NOI (Net Operating Income) to save towards major repairs that come with property ownership such as rebuilding a roof, bathrooms, kitchen, flooring and general remodelling. This, to me, is the only type of home ownership cost that can be saved towards during home ownership. All of the rest I would rather cater for before as they can happen at any time.

Thus in my opinion beforehand you need to save up for:

• 20% value of property as a deposit
• 3 times monthly rental for preoccupation repairs
• 6 times monthly rental for post-occupation and vacancy (revise this in line with rental increments)