The ‘sleep Test’ and How It Affects Investment Decisions

First-time property investors take a lot of things into account before jumping onto a purchase, from financing to asset management, but one consideration ties all these up — risk factor. One investor shares how the ‘sleep test’ helped her get a good first investment property: Momentum Media’s Katarina Taurian started off as a first-home buyer before she eventually decided to move out and become a rentvestor.“I thought, ‘Do I get a roommate in here? Do I rent it out wholly? Do I just continue to live in the lap of luxury and have a two better all to myself?’ Then, I decided that reinvesting was probably a better choice for me, mostly because I don't think I could stand to see someone else live in my unit with me,” the budding investor quipped.

The 75 sqm two-bedroom unit with a car park has been tenanted shortly after it went on the market. Seeking the service of property professionals is one of the most important things that helped Ms. Taurian through her transition from homeowner to reinvestor. Among the professionals that she has consulted throughout the process are her mortgage broker, accountant and property manager. At the beginning of her investment journey, she immediately sought advice on getting her finances in order, particularly in terms of home loans and features.

Ms Taurian shared: “Right at the beginning, I consulted a mortgage broker, and she was endlessly helpful in terms of product advice and just generally guiding me through the entire loan application process—sending me alerts and keeping me calm, telling me which parts of the process were normal and which parts I needed to pay attention to urgently.” “Even before that, I saw my accountant to say, ‘Do you think I'm financially okay to go ahead with this strategy?’” she added.

The budding investor also considered her superannuation for possible investment advantage in the future. “I made sure that my super was completely consolidated so that, later down the track, if I wanted to possibly buy in my super, that could be an option and I won’t get myself into loads of debt outside of my super,” Ms. Tuarian highlighted.

Aside from sorting out her finances, Ms. Taurian also made it a point to manage her risks well and make investment decisions that are within her risk appetite. For instance, since she was able to save up a lot through the years, her accountant suggested that she split her cash into a few separate purchases. While the advice was not at all misguided or negative, the strategy meant too much risk for her at this particular point in her journey.

Ms. Taurian said: “I'm particularly pleased that I didn't go down that path. I learned that, with my first mortgage, the sleep test is so important. I'm gradually becoming a lot more steady and a lot more comfortable with the level of debt that I'm in. I think that strategy will be a lot more useful in the years to come.” The ‘sleep test’ or ‘sleep-at-night factor’ may sound a bit emotional, but for the budding investor, being comfortable in her strategy means that she could move forward in her wealth-creation journey in the most efficient way based on her goals, capabilities and limitations.

Among the things she considered are the major changes that could happen in the near future, including having a family of her own, which could mean taking a time off from work and temporarily halting her main source of income. These specific considerations helped her map out a long-term investment plan and ultimately minimize the risks associated with growing a property portfolio.

Aside from engaging professionals, Ms. Taurian also crafted spreadsheets that detail the most significant information about her portfolio to be able to track the performance of her future assets.

“There was no way that I wasn't going to dot my Is and cross my Ts. I needed to know that I was always going to be safe even if I had a period of no income. I always to just keep my brain calm” according to her.

At the end of the day, Ms. Taurian believes that successful investments come down to good planning, particularly about finances and property management, which are among the top influencers of overall returns.

Property investment planning can help investors prepare for possible effects of unexpected life changes on their cash flow and, ultimately, their portfolio and its wealth-creation potential.