Updated: Oct 31, 2020
"If you acquire quality assets, and hold these assets through two or three growth cycles, it will change your life"
Are you interested in property investment, but not sure where to start?
Here’s our TOP TEN tips to consider when starting out.
This piece is put together in the context of a long term, buy and hold strategy with residential property- which (in our opinion) represents the lowest risk & lowest effort of all property investment strategies. We acknowledge that when it comes to building wealth through investment property, there are many ways to skin the cat, including renovation, flipping, development & commercial property- All strategies with their own pros and cons, but that’s a discussion for another day.
Let’s get started
ONE: Build a plan
Before doing anything, we recommend you take the time to consider some big questions. What are you looking to achieve from investing in property? What is your big WHY? Are you looking to exit the 9-5 grind to live your life on your terms, or are you looking to build income for retirement? Solidify these goals from a financial, lifestyle and timing perspective, and then consider how investing in property can help you achieve these goals.
For example, if you are looking to build a $75K per year retirement income in 15 years time, how many properties will you have to own outright to deliver this? Does it suit your risk & income profile to achieve this via one single blue-chip property, or would you generate the same result with four higher yielding cheaper properties? If the number of properties you require is four, will you acquire four properties and pay down all debt, or will you purchase eight properties, wait for their value to double, then sell 4 to eliminate the debt?
There are different ways to achieve the same end goal, but whatever path you take, you need a plan. Map out this plan and document it. If you are investing with your partner, couples who are closely aligned on goals have a higher rate of success. Are you and your partner on the same page?
At this point in time, you should also consider building you own property investment team- a selected group of subject matter experts who will help you achieve your goals. A typical team of trusted advisors would include a Property Investment Advisor, a Mortgage Broker, Accountant and Buyers Agent. Conversely, you may wish to be DIY investor. To avoid making serious mistakes and losing money, DIY investors should undertake substantial education as a first step. Ensure this education is sourced from a reputable source, and NOT someone who is trying to sell you a property (often referred to as a property spruiker).
TWO: Property investment- A game of finance
Chances are, you’ll need to borrow money to build your property portfolio- so whilst property is a game of bricks and mortar, it’s also a game of finance. To build a property portfolio of multiple properties, you won’t just need a single loan approval, you’ll need a holistic lending strategy, which has been tailored to your specific goals and circumstances.
Engage a Mortgage Broker (who is well versed in property investment) to build this tailored lending strategy. It will be your ability to fund acquisition deposits & closing costs (through cash or equity), plus your ability to service loans which will determine the level of funds you will have access to- and hence the scale of portfolio you can build. Your broker, with access to a wide panel of lenders, will match the lender and loan product to best suit your investing goals.
With 2019 lending conditions being extremely tight as a result of APRA’s macro prudential policies and the 2018 banking royal commission, leveraging the guidance and expertise of any investment savvy Mortgage Broker is more important than ever.
THREE: Long term money management is key
To build substantial wealth through property (via a traditional low risk buy and hold strategy), you’ll need to hold your properties for the long term (10- 15+ years). Money/ cashflow management is key to holding properties for this amount of time. Are you a good money manager? Is your income likely to rise or fall? What would you do if you lost your job? Will you need to drop back from 2 to 1 income at any stage soon? Do you have any large one-off expenses looming on the horizon? Can you afford to hold investment properties and maintain your current lifestyle? These questions all need to be considered before embarking on a property investment journey.
FOUR: Run your own race
The best time to invest is when you are ready to invest. Don’t follow the herd or pay attention to the click bait property headlines. Property investing is a long-term play, so If you are ready to invest from a financial, mental and emotional point of view, go for it. Buying anti-cyclical into a flat or falling market allows investors access to a greater number of quality properties, with fewer competing buyers. A- grade investment properties are extremely hard to secure (at the right price) in boom times, as the FOMO driven herd takes a ‘win at any cost’ approach.
FIVE: Buy quality assets
Asset selection is critical to wealth creation. Take time to fully educate yourself on what a good investment property looks like and the drivers that fuel capital growth. Alternatively, outsource the acquisition to a reputable and Licenced Buyers Agent. Be aware the property market is unregulated, so not all ‘advisors’ are qualified or acting in your best interests. Look for Buyers Agents (or Buyers Advocates as they are called in Victoria) who are affiliated to industry bodies such as PIPA or REBAA.
SIX: Take a balanced approach to yield
Yes, cashflow is critical. However, if you are looking for capital growth, take a balanced approach to high gross yield properties. Such properties are often located in low socioeconomic areas or small regional towns. Lower- socio areas carry risk in terms of attracting quality tenants, which has a myriad of flow on effects for investors and can drive a large variation between on paper gross yields and actual net yield. Raising rents in these areas can be problematic, as incomes are low. Also, be wary of the investor to owner occupier ratio, as over the longer term it’s the emotionally engaged owner occupiers who drive prices up. Don’t get me wrong, having cash cows in your portfolio is fine, but balance these out with some growth assets. It’s these growth assets that will build you meaningful wealth.
SEVEN: Diversify- Don’t put all your eggs in one basket. Look to diversify your assets in different markets. Buying in different States can maximise opportunity and spread risk, as not all growth cycles move at the same time. For example, following a long phase of growth to 2017, the Sydney and Melbourne median prices are now in a downturn. Conversely, some Regional markets within NSW and VIC are now growing, as are parts of Canberra, Brisbane and Adelaide. Being a borderless investor, and having a geographically diversified portfolio enhances your chances of always having a property that is in a growth phase. Holding properties across different States also limits your exposure to land tax. This is due to the fact that land tax is State based, and each individual has a tax -free threshold in each State.
EIGHT: Find a GREAT Property Manager. A great property manager is worth their weight in gold. In my experience, you get what you pay for, so don’t negotiate so hard on PM management rates that you forgo performance. If you are not satisfied with your Property Manager, have a discussion with their Manager or even the Agency Principal. If you don’t get the performance you are looking for, move agencies. Your property portfolio is a business, so you should manage it like a business. Stay close to market rents, and ensure your property never falls behind fair market rent. Understand when leases are due to expire and prompt your PM to push for lease renewals to avoid expensive vacancies (and re-letting fees). Consider allowing tenants with pets- Tenants with pets are often willing to pay more and stay longer, a double win for investors.
NINE: Protect your assets. Stay on top of maintenance, and ensure you have funds set aside each year for repairs and maintenance. A well-maintained property will attract better tenants, maximise rents and minimise vacancies. Ensure your properties are sufficiently insured via both building insurance (if non-strata), and landlord insurance.
TEN: Let time do its thing- Hold your portfolio for as long as possible to benefit from the compound growth effect. Remember the line of growth is not always linear, as property growth moves in cycles. Many investors sell their properties too soon and fail to reap the MAGIC of compound growth. If you acquire quality assets, and hold these assets through two or three growth cycles, it will change your life.
There you have it, ten considerations for anyone looking to either get into property investment or grow their current portfolio. Not an exhaustive list, but certainly some thought starters to wrap your head around.
If you need to help from a Qualified Property Investment Advisor, a Licenced Buyers Agent, or require assistance setting up your own property investment team, feel free to get in touch with Grant Foley Property on 0407 447 043
© Grant Foley Property 2019
The content of this article is of a general nature. Investors should seek their own independent legal, financial