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Every property investor needs one of these

Every property investor needs one of these

On the whole, Australian’s aren’t great at saving money. It’s why investment platforms like shares, property and term deposits have been so successful – because they prevent us from doing what we’re good at… spending. In September 2016, Australians were saving just 8% of their income, down on the 11.8% they were saving after the GFC. However, property investors need to do both. You need to invest – and save. Not just to buy the next property, there’s equity for that. But you should be saving for a rainy day or a time in your life when everything goes wrong all at once. Because it happens. This is where a cash buffer becomes a life saver.

 

Why have a cash buffer?

If your tenants suddenly leave and your property manager tells you rent has to drop by $30 a week in order to be competitive in the market, at the same time when your second investment property requires a new hot water system, which is needed in the same week as the school fees for your children’s private schooling are due – what in the world do you do?

If you were smart, you’ve have a cash reserve that you can draw from for each property. These cash reserves mean that you have a way to cover unforeseen expenses or cash holts and it stops you from disrupting or compromising your everyday standard of living while you do so.

 

Exactly what is it and when do you use it?

Theoretically, a cash buffer is an account that is dedicated just to one property. It’s there 24/7, 365 days of the year – just in case. It doesn’t get touched unless it is an emergency relating to that property. And when it’s used it’s topped up to the original amount as quickly as possible.

The difficulty is that you need to understand the difference between a genuine emergency and a poorly planned financial situation. When we sit down with our clients, before they sign the dotted line to buy their next property, we overview the expected costs of the property. Expected maintenance, tax, interest, rates, the whole lot. Anything covered here are things that need to be accounted for – and are definitely not valid reasons to touch the cash buffer. Anything that isn’t mentioned there, definitely is.

 

How do you set it?

If you have cash in savings, allocate it to your properties now. Put it in separate bank accounts and leave it. If you don’t want to draw on your savings and already have an investment property, restructure and draw on your equity to set one up.

There’s no magic amount that works. Some people choose a flat $10,000 per property. Some choose a percentage of it’s worth. Some use time as a measure – how long could this sustain us in an emergency as a replacement for the rental income? Think about what works for you and speak to your financial adviser about it.

 

Some people don’t like to have cash lying around, not earning significant interest, but it’s a step that property investors should take so when that rainy day comes around, they have one heck of an umbrella.

If you’d like to learn more about property investment, please contact us by clicking here.

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