Some advice for rookie property investors
Thursday, August 1, 2013/
Property investment is not something you should enter into lightly. But for some reason, that’s what a lot of people who have dreams of making millions with real estate do.
They think, “I can go out, buy a house somewhere, stick in some tenants to pay the mortgage and make a killing! How hard can it be?”
Fact is most property investor’s fail! The stats show that around 50% of people who buy an investment property sell up in the first five years and of those who stay in the game, 90% never get past owning one or two properties.
So if you’re looking to get into property or move up to the next rung of the property ladder, here are some words of advice:
Knowledge is property investment power!
Firstly, you need to understand what makes a good property investment and recognise that not just any old digs will do.
You can profit from real estate in one of four ways, and if you get the combination right you’ll make money from bricks and mortar. They are:
- Capital growth – to build yourself a sound asset base your properties will need to appreciate in value at wealth-building rates (in other words, above average capital growth.) This will come from strong demand from owner-occupiers (who push up property values) and tenants (who help you pay your mortgage.)
- Cashflow – in other words your rent.
- Tax benefits – while you should never invest solely for this reason; a good tax strategy can help you manage your cashflow, decrease your tax obligations and increase your bottom line.
- Accelerated growth – getting your hands a little dirty (metaphorically speaking) by investing in a property that needs a bit of cosmetic TLC through renovations, or a major facelift through property development, is a great way to manufacture capital growth.
While timing the market is not the be-all and end-all, it certainly helps to understand how the property market moves in cycles.
Following the herd and buying when everyone else is on the property bandwagon doesn’t always work. That’s often when the market is near its peak.
On the other hand you have more chance of nabbing a good deal in a buyer’s market, when property is out of favour. That’s why Warren Buffett said, “Be fearful when others are greedy and be greedy when others are fearful.”
Currently many of the property markets in Australia are in the early upturn stage of their cycles, creating good medium-term investment opportunities.
Location can make or break a property investment. But what is the right location?
I look for areas that will have strong ongoing demand from a wealthy demographic of owner-occupiers who can afford to and are prepared to pay a premium to live in good locations. Some of the major drivers of this type of capital growth are:
- Proximity to the city
- Proximity to the sea
- Adjacent to a prime suburb
- Proximity to amenities such as a train station, large shopping centre, within the zone of a highly sought after public high school.
- Suburbs that contain period style homes e.g. Californian bungalows, Federation, Victorian, Edwardian style homes.
I also like buying in areas going through gentrification – a suburb that is relatively cheap now but has the potential for capital growth in the future as a wealthy demographic of people move in.
One way to find this type of location is to drive through the streets and look for some of the obvious indicators that people with money are moving in:
- Are people spending large amounts of money on renovating/extending their homes?
- Are there small black (or maybe now it’s white – the new black) BMWs and Audis parked in the driveways or are they old Ford Falcons and Holden utes?
- Is the nature of the shops changing – more cafés and deli and lifestyle shops.
Money, money, money
A sound financial strategy is as important as a sound investment strategy when it comes to property.
Without a well-rounded understanding of how to maximise your borrowing power, use equity as a leverage to build your portfolio and maintain a financial buffer to see you through the difficult times that we all ultimately face, you are setting yourself up to fail financially.
It’s important to set aside a cashflow buffer in a facility such as an offset account or line of credit, to cover you for a rainy day.
While you could make lots of money through property investment, you could also easily lose it.
If you are financially illiterate when it comes to managing money, budgeting and even balancing the books at home, how do you think you’ll go when it comes to a multi-million dollar property portfolio?
You may need to learn the ins and outs of taxation and the financial advantages you can enjoy as an investor, as well as the best structures to own your investments in, such as personal, company and trust set-ups.
Rather than trying to learn it all yourself and wear numerous hats, it’s worth surrounding yourself with a good team of professionals who can guide you with their knowledge and expertise. An independent property strategist, a finance broker and an accountant should all be people you rely on to support you in the journey to real estate riches.
If you’re the smartest person on your team, you’re in trouble!
Some final words of advice (or warning) for investors
- Formulate a plan – understand what you want to achieve and then make investment decisions accordingly.
- Be cautious –you’ll find everyone is happy to give you advice. Rather than listening to well meaning friends, it’s important to only listen to people who have achieved the financial independence you’re looking for and who have maintained it for a period of time.
- Understand the difference between a salesperson and an advisor. Many salespeople are cloaked as advisors and suggest they are representing you, the buyer, when in fact they are representing the seller or a property developer.
- Be prepared to pay for advice – it’s much cheaper than learning from your mistakes.
- Not everything that glistens is gold – often when you start out it can be tempting to see opportunities everywhere. The problem is you don’t yet have the perspective to decide what is a good investment and what is not.
Property doesn’t discriminate; it doesn’t care who owns it. Today the residential property market is worth $4.68 trillion, according to RPData, and over the next decade it will increase in value by billions and billions of dollars. If you get it right, you can have your share.