The Basics of Property Investment 3 Part Series – Part 1
Everyone needs to start somewhere, regardless of the journey, and the grand expedition of property investment is no different. There are plenty of peaks to scale and pitfalls to avoid, but without the correct guide it’s easy to find yourself in financial quicksand. The first step along the trail is to get a handle on the basics before summiting the mount.
In this 3 Part series you will learn the basics of Property Investment…
WHY DO PEOPLE INVEST?
There are plenty of investment vehicles keen to drive your dollar, so why choose property?
According to Paul Reid of AssetZ, it’s about simplicity and familiarity.
“No one knows property is always going to go up but they know that generally well-priced property is pretty secure in the long term,” Reid says. “Property is the easiest thing for everyone to do because you don’t have to be a genius.”
The financial hiccups of late 2008 also vindicated all those who hung their future security on bricks and mortar, he believes.
“The GFC, in a way, was great for property investors because it showed that even if you were good at buying shares, you could end up with zero whereas no matter how badly property goes, you’re still going to do alright as long as you can hold on.”
Paul Douglas-Irving also of AssetZ believes investors like to get comfortable with investments they know. When it comes to investing, he believes it’s best to remove the emotion.
“Most people assume they know about property investing because they own a home, but the reality is buying a property is a business and buying a home is rather emotional,” Paul says.
There’s a tangible facet to the asset that investors are also drawn to.
“A lot of people like driving past the property. There are just some key basics people need to know to be able to buy it properly so that they can make money.”
Property as a vehicle tends to avoid severe volatility as well. While sharemarkets can be prone to sudden seismic shifts, the property market will seem becalmed by comparison. Combine this with the enforced savings regime of regular mortgage repayments and real estate has plenty to offer as a long-term investment prospect.
IS PROPERTY FOR EVERYONE?
Can anyone use property to create wealth? The consensus of our experts seems to be a convincing “yes”, but you need to make plans and get ready before jumping in.
“I think you really have to have some characteristics in common with most successful property investors,” Paul says.
“That is, they know the numbers and they understand why they’re buying something and what the end goal for the property is going to be.”
However, he points out there’s no reason you can’t outsource your shortcomings. Just ensure you identify them in the first place and concede someone else might be better equipped to handle them.
“There are also very successful property investors who recognise they don’t have the numbers and have an expert take that on for them.”
MEASURES OF SUCCESS
The two most discussed investment measures. These gauges will define the strategies you adopt in your investment portfolio.
In its simplest sense, capital growth is the increase in the value of the property minus the original cost of that property. For example, if you purchase a property for $300,000 and one year later it’s revalued at $350,000, you’ve made $50,000 in capital growth for the year.
The figure is often expressed as a percentage by dividing the amount of growth by the initial outlay. For the above example, $50,000 capital growth divided by the original $300,000 outlay equates to a 16.7 per cent growth for the year.
Rental yield is the amount of money received in rent for a property expressed as a percentage of the original outlay. In our previous example, if the property received $280 per week in rent, it’s earning $14,560 per year in gross income. Divide this gross yearly income by the original $300,000 outlay and you get a 4.85 per cent yield for the property.
If the purchase price is low but the rental return is high, it’s apparent you’re on to a good yield prospect.
These basic definitions are two of the more frequently used terms in investing.
Part 2 of the series coming soon…
WHAT’S A GOOD BENCHMARK?
It’s not entirely fair to apply the one set of numbers to all properties but benchmarking the minimums should form an important part of your investment considerations.
Paul Reid is a capital growth focused investor but he also recognizes the benefit of rental income in most projects.
“A benchmark would be say five to 10 per cent growth, four to five per cent yield if you get into something more speculative,” he says.
“Further out of town, you might get five to eight per cent yield but then you’ll probably only get three to eight per cent growth… choose what proportions you want.”
Capital growth is pivotal for Douglas-Irving as well when it comes to his investment strategy.
“I try to buy below the market, in an area with good capital growth and add value… my (preferred) method of adding value is sub division,” he says.
Also, making sure cash flow is good from the outset means you can let capital growth take care of itself.“I am pretty conservative. I wouldn’t buy anything I couldn’t maintain if the income fell away from it.”
IS LOCATION EVERYTHING?
When adopting capital growth as your motivator, Reid believes you can’t ignore the time-held rule of ‘location, location, location’.
“If I’m looking at a long-term buy and hold (strategy) position is what is giving me my guarantee” he says.
Douglas-Irving believes you shouldn’t get too hung up on just finding the worst house in the best street. To him, position is not all about being in the best ‘blue chip’ suburb. “The really clever investors… they’re always looking for a twist and the twist is not always obvious,” he says.
“I think a lot of people focus too much on ‘position’ and by doing so they’re narrowing their field down… every single one of my properties is amenities driven with major infrastructures, transport upgrades, schools, shopping centres and good medical facilities. I invest in areas people want to live in – That’s my risk minimization.”
WHEN SHOULDN’T I INVEST?
“I’d generally think there’s never a bad time (but you must stick to some basic guidelines) unless it’s completely obvious you’re in a boom,” Reid says. “My golden rule is if I’ve got cash, I’ll buy.”
Douglas-Irving concurs and says the only really wrong time to buy is when you don’t have any money.
“I’ve always bought when I can afford it, regardless of whether it’s at the top of the market or the bottom of the market,” he says.
IS IT EVER TOO LATE?
If you’re one of those investors coming late to property, we all agree there is still an investment strategy that will suit.
“We have had 65-year-olds ask am I too old? Our response – no, because if you’re planning on living for another 10 years that’s an average property cycle and there are so many ways to secure property these days it doesn’t just have to be purchased in an individual’s name, we can look at SMSF, family trusts etc. “For me, it’s never too late -. Obviously you need to balance the risks.”
The greatest hurdles might be in some of the practicalities of financing, according to Reid “Giving a 70-year-old a loan for 30 years does have some concerns for some people,” says. Douglas-Irving (who is no spring chicken)
“However I think with age comes some degree of wisdom in recognizing the time-value relationship of investments and they’re probably the people who will be getting the investment adviser, the mortgage broker, the financial planner and having those three people working as a team for the goals that they’re trying to achieve.
“I think in that respect these (late starter) investors probably have a greater degree of success than most first-time investors.”
GETTING UNDER WAY
Sometimes just making the decision to become a property investor can be the most daunting part of the process. Here are some tips to help you decide.
1. Set your goals
Now you know that property investment is for you, it’s time to look at your goals. Are you a young gun looking at the long-term prospect of a property portfolio? Do you fancy yourself as a small project developer hoping to give the family income a boost? Are you heading towards retirement and wanting to lock down a secure cash cow?
Your goals are your motivation for getting into property investment and will guide your strategies for the ensuing adventure. Write them down and you’ll have a solid foundation on which to build your bricks and mortar dynasty.
2. Know your numbers
Make sure you’re aware of your numbers – that is, all your numbers. Write out a statement of financial position. List your assets and liabilities, draw up an income and expenses document and revisit your household budget.
All of this comes into play, particularly when you head off to your finance broker to find out how much you can confidently borrow, or at least what financial guidelines they require when you start looking for your real estate purchase.
These figures will also help you reflect on your goals. For example, you might be a little richer in the assets column than you thought but the income seems tighter, so heading towards a yield-driven property becomes more crucial.
3. Do your research
There’s more information out there than ever before and the vast majority of it can be sourced for free.
Douglas-Irving says “Take action’ – sure, do your research but avoid analysis paralysis. At some point you’ll need to stop reading and start doing. “You want to do a reasonable amount of research but not too much, otherwise you’ll never put it into practice.”
4. Decide on your strategy
Once you’re in the zone, you have your financials and you’re feeling educated about the scene, try and consider the best investment type for you.
There’s a plethora of options. AssetZ eBook ‘15 Money Making Ways to Buy Property In Australia is an informative guide of the many strategies that work in Australia
5. Getting help
While you’re getting smart about all facets of your plan, it would be a good idea to lock in a few go-to experts who can grease your investment wheels. Apart from enlisting the assistance of an investment adviser you will need a good finance broker, solicitor, property manager and financial planner.
“I’m a big advocate of using experts- learn from their mistakes and success’s,” Reid says. “it will save you time, get you in the market sooner and creates opportunity I think they’re a great investment.”
Another great source of help is a qualified property adviser. They’re bound by professional integrity to be confidential and independent and can save you serious money when you’re not completely sure about particular area or property type.
Just start and take positive action – talk to an expert and find out what you can do based on cash flows and personal circumstances.- AssetZ is perfectly placed to offer independent and impartial advise and offers individual free consultations to establish what is achievable and practical.
Property investment is an education but the rewards can be lucrative and fulfilling as long as you nail the basics from the start.
Any advice provided in this publication should be considered General Advice as it does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate for you and whether you should act upon it.