If only it was a simple strait forward answer. Unfortunately the answer has many variables and will be different for different investors.
One of the main questions that should to be answered is: “What is my comfort level with risk?”
Some investors can be living each day down to the last cent; making split second decisions. Some investors will keep them selves awake at night worrying about their choice of bathroom tile colour earlier that week. Before putting together an investment strategy; any investor must gauge their own personal comfort level with risk.
In this context, risk pertains to market selection, LVR and several other factors. One could choose to invest in a blue-chip, stable market with minimal chances of correcting that may not move as quickly, or a market that is slightly less desirable but has great potential for growth based on gentrification. A clear understanding of the market you are investing in, from a statistical perspective, will help to take away the fear of the unknown to those investors who are less comfortable with risk.
Another factor to consider is: “What can I afford to pay monthly / weekly?”
There are several ways a property investment can begin to cost an investor money on an ongoing basis.
If a rental market softens it may come down to an investor reducing their rent to keep a tenant (or find one). The risk of needing to reduce rental income can be mitigated by selecting highly demanded markets.
Realizing that you may need to reduce your rent should be taken into consideration. Can you afford for this to happen? It would also be best to keep some buffer of funds available for a period of vacancy. Your tenants will have ups and down in life and there is a chance that they will need to move out and leave you to cash flow an investment until you replace them. Your buffer could limit the size of portfolio you are able to hold.
Our focus as investors is to hold as much assets in growing markets as we are able. Before jumping into an opportunity, be sure you know all of numbers and understand potential risks so that you can give yourself the best chance of sustainable growth.