Investment tip: The importance of budgeting

According to him: “[I made the] worst investment decisions because I made my decisions emotionally. I made my decisions as … ‘Wouldn't you love to live there? See the views?’ It was really, really bad.”

“The cash flow was really poor and I didn't understand [about the] body [corporate]. I didn't understand the fees that the agents take. I didn't really understand the impact of rising interest rates,” the investor added.

Mr Whitlock ended up stretching himself too far—he put everything into his vision as an investor.

Unfortunately, the burden became too much when he took a job that didn’t quite meet his expected compensation. When Mr Whitlock couldn’t make ends meet, the pressure was felt by his whole family, including his wife and two young children.

“All of a sudden, I was underwater … One of the things that people need to be aware of [is] if your own personal circumstances ... and the market change together, you're in real trouble,” he said.

After a while, because he was struggling to keep up with repayments, he had to sell one of his properties which made him lose money and ultimately “hurt … like losing a limb”.

If given the chance to educate his younger self, the now 50-year-old investor would most definitely emphasise the importance of understanding cash flow.

Mr Whitlock said: “It's not hard to … work out what your property may be worth, [but] what I would say is, understand the value of cash flow. It's critical, because [if] you're chasing capital growth but you're hemorrhaging on a monthly basis, that's a bad thing.”

“Is it worth losing $12,000 a year to hope to make a capital gain in the future … ? Cash flow is king,” he highlighted.

In order to avoid making the same mistake of overextending himself, he learned the value of research and budgeting and used these principles as his main guide to investing.

Budgeting and buffers

One of the most important steps to take before securing a property is research, accountant Michael Johnson said.

Aside from the fundamentals, he recommended making time to digest the numbers, including associated costs, interest rates, and possible returns. This step will not only help you do away with emotions when making decisions but also aid in crafting a long-term plan for your portfolio.

Mr Johnson explained: “[Understand] not only what your spending habits are but, straight away, [ask yourself] … ‘How much is this going to cost me in the short term? And the medium term? And the long term?’ "

“That is … ‘What happens if the rates go up by a percent? What happens if there needs to be some major maintenance … ?’ There's a few different things you have to think about,” he added.

Making a spreadsheet or any easy-to-understand document can help you keep track of the data you will need throughout your journey, the accountant said. He also encouraged getting a second opinion by having a trusted family member or a friend to look over these documents.

By having a detailed plan of action, you avoid going over budget and give yourself the ability to map your journey and set up buffers for when you are most likely to get hit, according to Mr Whitlock.

As he went on his investment journey, Mr Whitlock recorded every cent he spends and earns through his portfolio as part of his budgeting.

According to him: “I suddenly became very good at budgeting. I'd got a spreadsheet [where] I recorded every cent that I spent. Every cent … I had a spreadsheet where I looked at the income … and I would start to map … when I'd get hit.”

“[Then], I have to try and put a buffer in to make sure I could make ... mortgage repayments… because … [when you are] unable to meet the mortgage repayments … that's when you're really, really in trouble,” he highlighted.

When budgeting, Mr Whitlock strongly encourages taking all things into account, down to the smallest cost. This will help you look back and take accountability for all your decisions.

He said: “The most important thing is to make sure you're looking back ... and looking at how much you actually spent … You want to have that plan and review process … The review bit is what, sometimes, people miss.”

According to him, you need to be conscious about your finances no matter where you’re at in your journey because, at the end of the day, building a better future is not worth sacrificing the present.

Tune in to Alex Whitlock and Michael Johnson's episode on The Smart Property Investment Show to know more about how to build and sustain a portfolio for the long-term.