In my experience the two big things most property investors fail to do are:
- Have a formulated property investment strategy
- Regularly review their property portfolio’s performance
Looking at it this way it should come as no surprise that most investors never get past owning one or two properties.
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If you don’t really know why you want to build a property portfolio or how it will one day get you out of the rat race and if you don’t really know where you are heading, how will you know which properties to buy?
And how will you know if you’re on track and on target?
The trouble is if you don’t know where you are going, any road can get you there, but any road can get you lost. And nowhere is this truer than property investing.
What are your goals?
How much money do you want your property portfolio to produce? How many properties will you need to achieve this?
And what type of strategy are your going to follow – capital growth or cash flow or are you just going to leave it up to luck?
Currently there are over 350,000 properties on the market in Australia, yet not all of them will make good investments.
In fact, most won’t.
To ensure I only buy properties that outperform the market averages I use a…
Five-stranded strategic approach
- I would only buy a property that would appeal to owner occupiers. Not that I plan to sell my property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the current market when the percentage of investors in the market is likely to diminish
- I would buy only buy a property below its intrinsic value – that’s why I avoid new and off-the-plan properties which come at a premium price.
- I look to buy in an area that has a long history of strong capital growth and that will continue to outperform the averages because of the local demographics. This will be an area where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes. In general these are the more affluent inner and middle ring suburbs of our big capital cities
- I would look for a property with a twist – something unique, or special, different or scarce about the property
- I would buy a property where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
While most investors read a book or two, do a little research and then buy one of the first properties they come across, strategic investors are smarter than that.
They follow a system that is rooted in the real world and has stood the test of time in changing markets.
By following my five-stranded strategic approach, I minimise my risks and maximise my upside. Each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour.
If one strand lets me down, I have two or three others supporting my property’s performance.
But it doesn’t end there. I also suggest you…
Regularly review your property strategy
While most investors just buy a property and hold it for the long-term, strategic investors regularly review their investment portfolio’s performance.
When I ask investors how their properties are performing they usually have no idea.
They’ve just closed their eyes, crossed their fingers and hoped for the best.
It makes no sense to invest in a property and then not review its performance every year or so.
Some investors avoid the tough decisions and excuse their property’s poor performance by saying things like “it will turn around eventually” or “I don’t want to make a loss, so I’ll sell it when I can cover my costs.”
Some questions you should ask
Every year I like to ask myself a few questions about each of my investment properties:
- How has this property performed over the last few years?
- Knowing what I know now would I buy this particular property again?
- Is this property likely to outperform the averages over the next decade?
- Is there anything I could or should do to improve this property and generate a better return on investment for me?
Logically, if a property has not performed well over a three or four year period, it’s likely to be a dud investment.
The answers to these questions help ensure that I only retain top performing properties in my portfolio and that my money is working hard for me.
But isn’t it the wrong time to sell?
If due to your financial capacity you can only afford to hold five properties, you should aim to own the five best-performing investment properties you can.
This means that if your property isn’t giving you the return you feel it should, then it might be time to make a change either through renovations, by changing property managers or by selling up and buying a better performing investment property.
I know that it’s likely that if one of your properties is underperforming, it’s likely to be in a location where the market is flat and you may not get the optimal price today.
You know…in one of the regional centers, or an outer suburb or maybe in a mining town.
But don’t wait till the market picks up because the gap between your underperforming property and better performing investments will only widen as the market moves and it will become harder and more expensive to buy the type of property you’d like to own.
Essentially the sooner you can identify and offload an underperforming property, the better.
Sure you may sustain a loss, or have to pay some capital gains tax on the sale and then pay stamp duty on your next purchase.
I understand this may mean that you’ll take two steps back to move three steps forward; but if you treat your property investments like a business, and that’s what all strategic investors do, you’ll recognise that it’s not how much money you make that matters; it’s how hard your money works for you and how much you keep that counts.
Treat your properties like your employees
You’ve probably heard me say that you should treat your property investments like a business.
And if that’s the case your properties are your employees.
Think about it…
If your employees came to work late, played on Twitter and Facebook all day, took a long lunch and when they came back weren’t in the mood to see your customers or clients, what would you do?
You’d probably give a performance review, which in the case of real estate are the questions I’ve just suggested you ask about each of your properties annually; and then you properly have to retrench them.
Sometimes you’d even have to pay a redundancy package to move them on so that you could employ hard-working people.
It’s much the same with your properties, these are your employees in your real estate investment business and they have to work out for you the long-term.
If your properties are not giving you “wealth producing rates of return” you won’t achieve the financial freedom you desire.
I’ve heard too many investors say something like “I know this property isn’t growing in value, but is not costing me anything to hold it.”
The problem is that not factoring in the last opportunity cost.
Sure their property may be cash flow neutral, but what these investors (conveniently) forget is the $50- $100,000 capital gain they may have made if I owned a property in a better-performing location.
The lesson for this is that sometimes you have to take a financial hit (that redundancy package) to allow you to move forward.
I know it’s sometimes hard to make these critical decisions – many investors are too emotionally involved with their properties and have difficulty evaluating their performance objectively.
That’s why I recommend you have somebody help you review your property portfolio annually.
Sure there’s lots of other mistakes you could make as an investor…
But if you have adhere to a proven property investment strategy and then regularly review the performance of your real estate portfolio, you’re likely to avoid the majority of blunders that other investors make.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property. Subscribe to his Property Update blog.