Cash Buffers Explained

Property investing rarely goes exactly to plan. Tenants leave, hot water systems fail, rates rise and life happens. A buffer means a bad month does not force you into credit card debt or a rushed sale.

From Andrew's own experience owning property in NSW and QLD, the investors who sleep well are rarely the ones with the most properties. They are the ones with a buffer.

There is no single right number. A common starting point is three to six months of total loan repayments and living expenses. Add an allowance for a few weeks of vacancy per property and a lump sum for repairs.

Consider a bigger buffer if your income is variable or self-employed, if you have several properties, if you have older properties, or if a single income supports the household.

An offset account is linked to your loan, and every dollar in it reduces the balance you pay interest on. Your money stays accessible but works to save interest. An offset on your home loan, where interest is not tax deductible, is often the most effective place, but speak to your accountant.

A redraw facility works differently: you make extra repayments and can draw them back, but lenders can restrict or change redraw, and redrawing from an investment loan can create tax complications.

Lenders may not ask about your buffer directly, but they do look at your savings and conduct. More importantly, a buffer protects your ability to keep going. We usually suggest planning your next purchase so that your buffer is intact afterwards, rather than spending it on the deposit.

It helps to picture what a buffer is actually for. Think of a tenant who gives notice just before Christmas and a property that sits empty for six weeks. Or a hot water system and an air conditioner failing in the same summer. Or a rate rise that adds a few hundred dollars a month across your loans, or one partner taking extended leave after the birth of a child.

Each of these is manageable on its own with a buffer in place. Without one, they can pile up quickly and turn a sound investment into a source of stress. The aim is not to predict every problem, but to make sure no single problem forces a decision you would not otherwise make, such as selling at a bad time.

Once you have used part of your buffer, treat rebuilding it as a priority before taking on any new commitments. A simple automatic transfer into your offset each payday is usually the easiest way to get it back to where it should be.