How much buffer is needed?

Good advice. Thanks.

We are currently looking at subdividing a block that we had previously thought we couldnt subdivide. But local flood mapping has been updated showing a lesser impact so it may now be subdividable. There is a decent chance it will go through.

If the subdivision happens we will sell the new block of land and that will give us a really good buffer. So fingers crossed that will happen. If not we will have to work out a plan b.

 

So now that interest rates are rising and extending IO loans has gotten harder, how many months/years worth of expense buffers are you keeping? 6 months? 1 year? 3 years?

 

wow,,i thought it's ppl panicking now, actually two years ago

 

The time to have gotten prepared for what's coming up was 2 years ago.

1. Values were higher and lending not as strict. You could refinance above current value, and put money aside as buffer. Unlikely you can even refinance current debt now if you're with Pepper or Liberty.

2. If you needed to liquidate, you were doing it before market turned. Before media was stating it was a bad time to buy. You are in a weak sales position now.

Investing is like chess.
Gta have plans a few moves ahead.

I aim for 6-12 months buffer.

 

Yeah. I would struggle to sleep at night in your position.
Total expenses of $3k/Wk I would want $150k as a buffer.
That’s 12months with zero income.

It may never happen. But plan for the worst hope for the best.

Especially as you are doing Reno’s etc which can drain cash pretty quickly.

Blacky

 

We are all good.

Sold one house about a year ago. Took 150k profit. Have enough left to finish out house extension and to complete a subdivision. I can continue renting the house that Im subdividing off as there are currently already two houses on the block (one was counted as a granny flat). So no preasure to sell if market sucks. But if we do choose to sell then we will walk away with maybe 200k profit. Have a rental breaking even ish. And a rental that averages $300 a week profit. Then I have my own place that I have a friend renting some of downstairs for $215 a week to help toward our mortgage.

So we have 40k cash at present. A project that we can complete and sell for 200k more cash. Almost a million in equity so maybe 40% equity in our current portfolio.

Our suburb has gone up in price 5% so far this year I think.

Im not stressing

 

We’ve tried to answer this question for different households lately, can access our calculator here. It’s generalised and largely educational for investors to consider different risk types when trying to work this out.

In general, I think there may be some unknown factors worth considering, largely around debt terms. Most of this is unrealised and ‘what ifs’, but that’s largely the point of buffers in the first place:

- LVR’s; if your at 90, the property itself is in a bit more risk and higher buffers are likely worth keeping.

- Repayment type: IO terms expiring worth considering, particularly if you don’t pass bank calculators servicing requirements anymore.

- Affordability: Your risk levels are really tied to your income generation ability. If you save a lot as a household every week with large surplus incomes, that indeed can be part of your buffers (flow buffers rather than stock)