Investing in property is an exciting and proven way to grow your wealth over time. It’s no surprise that many Kiwi investors aspire to diversify their portfolios by acquiring multiple properties.
However, determining when to purchase a second investment property can be challenging, as it hinges on various factors, including your financial readiness and the current market conditions.
Here's how to assess whether you’re ready to buy another investment property.
Financial readiness
If you’re financially ready to invest, now might be the right time to take action. Regardless of broader market conditions, there are always pockets in cities and regions showing growth and offering solid returns.
However, if you’re unsure about your readiness to invest in another property, start by evaluating your financial preparedness. Here are some key indicators to consider:
Solid cash flow
Evaluate whether your existing investment properties generate consistent cash flow. Positive cash flow indicates that your properties are profitable and could support the purchase of additional assets. Aim for a healthy cash flow that covers mortgage repayments, maintenance expenses, and vacancies.
Healthy emergency fund
Building an emergency fund is crucial for property investors. Unexpected costs, such as repairs, vacancies, or economic downturns, can arise, requiring immediate financial resources. Ensure you have sufficient savings set aside to cover any unforeseen circumstances.
Stable portfolio
Assess the performance of your current investment properties and the overall stability of your portfolio. A diversified portfolio across different property types and locations can help mitigate risk and withstand market fluctuations. If your properties show consistent growth and resilience, it could indicate readiness to expand your portfolio.
Consult your financial adviser
Once you’ve assessed your finances, speak with your broker or lender about loans, interest rates, and pre-approvals. Remember to only borrow within your means.
Ideally, aim to have a 35 percent deposit ready in cash or equity—or a combination of both. Also, prepare for potential interest rate rises to avoid any surprises in the future.
Researching the market
In addition to financial readiness, conducting thorough market research and assessing your personal commitment to owning additional property is crucial.
Understanding market trends
Stay informed about current real estate market trends and forecasts in your target locations. Look at factors such as supply and demand, rental returns, employment rates, and economic indicators. Identifying emerging property hotspots or potential risks can help guide your investment decisions and timing.
Responsibilities of homeownership
Owning additional investment properties comes with extra responsibilities. Consider whether you’re prepared to handle more property management tasks, tenant relations, maintenance issues, and regulatory compliance.
Alignment with financial goals
Assess how acquiring another investment property aligns with your long-term financial objectives. Clarify your investment strategy, risk tolerance, and desired outcomes. Determine whether the potential benefits of expansion—such as increased cash flow, equity growth, or portfolio diversification—align with your financial goals and timeline.
Consult with a property professional
Engage with a trusted real estate agent or property adviser who has expertise in your target market. A knowledgeable agent can provide valuable insights into local market trends, property values, and investment opportunities.
Signs you’re ready to buy another property
The best time to purchase your next property is when you feel prepared. Every property investor progresses at their own pace, so there isn’t a one-size-fits-all schedule for expanding a portfolio. However, there are some signs that you might be ready to buy your next property:
You have significant equity
Increased property value boosts your equity, making it easier to secure finance for your next purchase.
You have increased income
A pay rise or improved returns from your first investment can enhance your ability to buy another property.
Your first property is performing well
If your initial investment property is providing steady income and you’re comfortable with the idea of expanding your portfolio, this is a good indicator that you’re ready to buy.
Favourable market conditions
Look for areas with low vacancy rates, strong rental returns, and positive growth forecasts, supported by favourable interest rates and government incentives (e.g., new build incentives).
If any or all of these signs apply to your situation, it might be the perfect opportunity to purchase your next investment property. Carefully evaluate your financial readiness, which will give you the confidence to grow your portfolio. By investing wisely and seeking expert guidance, you can significantly enhance your financial future.
Whether you’re just starting out or seeking advice on expanding your portfolio, LJ Hooker is here to support you.