Let’s take a moment to introduce the idea of an offset account associated with a mortgage. Essentially, you will have two entities: a loan and a savings account. The savings account is the offset account which will basically offset your loan amount, saving you interest on your loan rather than earning you interest. For example, if you have $50,000 in your offset account and your loan is $450,000, you will only need to pay interest on $400,000.
The importance of a cash buffer
Why do you need an offset account? An offset account acts as a cash buffer. With property, particularly in Australia where rental yields are low and we are relying on tax returns to keep a positive cashflow, it is really important to maintain a good cash buffer. That’s why I’ve mentioned an offset account above because everyone should have one. But I believe you should really have two offset accounts.
Why have two offset accounts?
One offset account should be for your personal finances. This is all your money that is not related to your property, for your wages in and your bills out. You should have another offset account for your property money which would be your rent and your tax returns going in and any other obscure source of income you get from your properties and your expenses going out. It’s in this account that you should keep your cash buffer.
How much cash should you have in this account?
How long is a piece of string? Obviously the more money you have, the safer you are. A good rule of thumb is to have at least three months worth of mortgage repayments per property as your cash buffer. This means that all of your properties can be vacant and you’ll have three months to do something about it, like refinancing or selling a property if you have a major disaster. There’s an old saying in property investing: “good property investors buy time”. What does this mean? If you hang onto a property long enough, you’re guaranteed to make money. How do you hang onto property? By maintaining a cash buffer of three months’ mortgage repayments at a minimum.
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