If you have plans to buy an investment property. Its good to understand the 4 rules of exercising prudent in property investment.
1. Monitor cash flow and expense
Tabulate and record all cash flow and expenses incurred for the property on an excel spreadsheet. Monitor those numbers and check for any deviations or unplanned expenses. Always exercise prudent in managing your investment property.
2. Have a backup reserves
A good rule of thumb is to have 6 months of living and working expenses in fixed deposit, government bonds or in liquid assets. This is in addition to about 6 months reserve of monthly mortgage payment in case there are prolong vacancy period.
3. Expect for contingency
You need to factor in unexpected events such as repairs, rising interest rate or tenants defaulting. Its good practice to have addition saving on standby for such expenses.
4. Do a stress test
This is a “What If” situation. Financial institutions such as banks often do 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.
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.