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When it comes to property investment, there’s no shortage of information available about what budding investors should do in order to ensure success.
And just as important are the pitfalls to avoid so you don’t become a statistic of the property game.
While many investors start out with the intention of making it big in real estate, only a handful will ever get past their first investment, and even fewer will create real wealth by climbing to the top of the property ladder.
Our property markets have had an interesting couple of years – markets boomed in 2020-21 but have now fallen from their peak around the country.
The property boom gave some beginning investors a false sense of security and as we move through this next phase of our property cycle, there will be more traps and pitfalls than ever.
Not all properties will increase or decrease in value at the same rate and as affordability constraints continue to restrict borrowing, property values will likely continue to taper from the heady heights of the boom.
This is why careful asset selection is critical, and you need the right team around you to help make the best investment decisions.
To help, I’ve put together a basic guide to property investment for beginners with everything you need to know.
How NOT to invest in property
But first, before looking at how to invest, let’s look at how NOT to invest.
Here are 10 of the most common property investment mistakes beginners make, and some tips on how you can overcome them in order to win big with real estate.
1. Heart over Head
When buying a home, about 90% of your purchasing decision will be based on emotion and only 10% on logic.
This is understandable, as your home is where you’ll raise a family.
It’s your sanctuary.
When it comes to investing, however, letting your heart rule your buying decision is a common trap which needs to be avoided at all costs.
Allowing your emotions to cloud your judgment means you are more likely to over-capitalise on your purchase, rather than negotiate the best possible price and outcome for your investment goals.
Beginning property investors should always buy the property based on analytical research.
What are the local demographics?
Will this lead to the capital gains and returns you require?
Is it the best location to attract quality tenants?
That’s tenants who can afford to pay you increasing rent over the years rather than those who are only a week away from being broke.
Will it appeal to the owner-occupier market that sustains property prices in the long term?
By answering questions like this, rather than buying a house because you loved the curtains or thought it would make a good holiday retreat, you’re thinking based on financial gain rather than personal feelings.
And at the end of the day, investing is all about economics, demographics, and finance and not emotions.
When beginning property investors fail to plan, they plan to fail
It’s an old adage but very true.
The key aim of most beginning property investors is to build a lucrative property portfolio.
One that will one day give them financial freedom and choices in life.
However, doing so without a plan of attack is like setting out on a road trip without a map…you’ll inevitably take a wrong turn and end up lost!
You see…attaining wealth doesn’t just happen, it’s the result of a well-executed plan.
In reality, planning is bringing the future into the present so you can do something about it now!
Successful wealth creation through real estate requires you to set goals, determine where you want to end up, and then devise a cohesive plan to get there.
You need to focus on both the short and long term and ensure your investment decisions gel with your overall strategy.
Work out what you want to achieve with regard to income – are you chasing short-term yields or long-term capital growth – and how you can best manage your cash flow as a smart investor.
What type of property do you need to buy in order to meet your income goals?
With a carefully thought-through outline of your investment journey, you will end up exactly where you want to be.
So plan your action and then activate your plan.
If you’re a beginner looking for a time-tested property investment strategy or an established investor who’s stuck or maybe you just want an objective second opinion about your situation, why not let the independent property strategists at Metropole build you a personalised Strategic Property Plan?
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because we’ll help you:
- Define your financial goals
- See whether your goals are realistic, especially for your timeline
- Measure your progress towards your goals – whether your property portfolio is working for you, or if you’re working for it
- Find ways to maximise your wealth creation through property
- Identify risks you hadn’t thought of
And the real benefit is you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.
Learn more about how you could benefit from having a Strategic Property Plan built for you by clicking here.
3. Diving in or Dithering
Two of the most common traits of budding real estate investors who never make it beyond their first property (or sometimes never even make it to their first!), are either acting too impulsively or being overly cautious and never acting at all.
The first is being in too much of a hurry.
They think they have to have it all yesterday.
They attend one seminar and buy into the first crazy scheme they’re sold without thinking it through and when it doesn’t make them rich overnight, they lose heart and throw in the towel, saying property just isn’t for them.
The second are procrastinators and their own worst enemies.
They watch all the webinars, read all the books, listen to all the property podcasts, and watch all the videos, only to end up overloaded with information and unable to act.
We call this paralysis by analysis.
While the former can sometimes learn from their mistakes and make a success of their investment endeavours, the latter will never overcome their fears.
The best you can do is find a happy medium – sure, learn as much as possible to make you comfortable with your investment decisions but don’t think you can ever know it all before you begin.
You will always have something else to learn and the best way to gain knowledge is to immerse yourself in the game itself.
At the moment with all the property pessimists out and about and negative property media, many investors are second-guessing themselves and wondering if it’s a good time to buy or whether they should wait for the market to bottom.
Don’t try and time the markets…even the experts get it wrong!
Of course, I understand why investors would think it’s the right thing to do.
I know many financial planners recommend ‘when-to’ investments, which means you have to know when to buy and when to sell.
Timing is crucial with these investments: if you buy low and sell high, you do well.
If you get your timing wrong though, your money can be wiped out.
Shares, commodities, and futures tend to be ‘when-to’ investments.
I would rather put my money into a ‘how-to’ investment such as real estate, which increases steadily in value and doesn’t have wild variations in price (if, and only if, you buy the right type of property).
Yet is still powerful enough to generate wealth-producing rates of return through the benefits of leverage.
While timing is still important in ‘how-to’ investments, it’s nowhere near as important as how you buy them and how you add value.
‘How-to’ investments are rarely liquid but produce real wealth.
Most ‘when-to’ investment vehicles (like the stock market) produce only a handful of large winners but there tend to be millions of losers.
On the other hand, real estate produces millions of wealthy people and only a handful of losers.
Having said that, if you also get the timing right with property investment, if you buy at the right time in the property cycle, it can massively accelerate your investment returns.
4. Speculation over Patience
I’ve found many beginning property investors are hoping to become overnight millionaires.
They think the property will be a quick fix to their financial problems, but the truth is seeking short-term gains in real estate is more about speculation than strategic investing.
In fact, it takes most property investors 20-30 years to build a safe sufficiently large asset base to give them substantial financial freedom.
In other words, it’s not as easy as buying a property or two and living off the cash flow.
And there’s definitely no money in buying real estate and flipping it to make short-term profits.
After all, most property flips flop.
It takes time to sell real estate and then there are the numerous costs involved, including capital gains tax.
Where some might see this as a shortcoming, I see it as a strength; because the property is a proven commodity that we all need, it has the tried and tested ability to provide steady, long-term gains through the power of compounding.
In other words, you use the gains you make from one property to leverage into another property, and then with the combined gains you make from those two properties, you buy more to add to your portfolio.
Better still, you can use other people’s money (borrowed from the banks) to do so.
No other commodity gives you the ability to do this so successfully.
By approaching property investment with patience and persistence, you will gain far more success (and wealth) than if you seek out the “next big thing”.
Securing proven, high-performing property that grows consistently over the long term is the only way to ensure you make it to the top of the property ladder.
The chart below from Stuart Wemyss sets out the distribution of median house price growth since 1980.
You will notice that a growth cycle typically lasts 7-10 years.
And a growth phase is typically followed by a period of (7-10 years) of little growth.
The average growth rate over the past 38 years of each capital city ranges between 7.30% and 7.96% p.a.
That is, in the long run, there is not a large variation.
The diversity in growth rates over a long period of time highlights the cyclical nature of the housing market, with dwelling values rising at different speeds from region to region and period to period.
What’s ahead for property values?
If property prices were to rise at the same rate as the past 25 years, Australia’s median house value would reach $2.9 million by 2043.
While the past isn’t always the best predictor of the future, it’s a worthwhile benchmark to consider where housing values may be twenty-five years from now.
Based on national house values rising at the annual rate of 6.8% per annum over the past quarter of a century, in 2043, the national median house value would be approaching the $3 million mark ($2.93 million to be exact) and the median unit value would be $2.15 million.
Source: CoreLogic. Median values have been extrapolated based on applying the annual compounding growth in median values over the past 25 years to current median house and unit values.
5. Not doing your homework
Understanding property markets takes time.
And getting to grips with the cyclical nature of real estate is something that even eludes many experts.
So don’t think you can attend a seminar or two, or read a couple of books and have a handle on exactly what to buy.
Sure you can research an area on the internet or go to 100 open for inspections.
The problem is what is lacking in perspective and that’s something money can’t buy.
The trouble is most beginning investors get this step wrong because there’s a big difference between knowing your local neighbourhood and understanding the investment fundamentals of your property market.
That’s why more and more property investors and homebuyers are turning to the independent team of property strategists and buyers agents at Metropole to help level the playing field for them.
Why not click here now and leave us your details and have a complimentary, obligation-free session with one of our property strategists to discuss your individual needs & let our unbiased property strategists formulate a plan or review your existing portfolio?
6. Buying the wrong property
Of course, this is one of the biggest investment blunders of all!
Firstly you’ll need to choose the right investment location, one that will outperform the averages because it is going through gentrification, or because it is where affluent owner-occupiers want to buy.
Then you’ll need to buy an investment-grade property – one that will remain in continuous strong demand by owner-occupiers and tenants in the future.
With close to 10 million properties around Australia, less than 2% of those currently on the market are what I would call investment grade.
7. Poor cash flow management
It’s easy to fall into the trap of poor cash flow management as a beginning property investor.
Understanding all of the costs involved in acquiring and holding property can be difficult and you should always seek the advice of a professional accountant who knows about real estate investment to ensure you know exactly what you’re getting into financially.
You also need to make sure that you can afford to hold onto any property you buy.
In other words, how much income will your investment(s) generate, and will it be enough to cover your outgoings?
If not, can you manage any shortfall?
Don’t forget to account for any contingencies, such as extended vacancy periods or unexpected maintenance costs.
A good rule of thumb is to allow about 10% of the property’s value for costs such as rates, land taxes, insurance, maintenance, and management fees.
It’s great to dream about the riches you can make from real estate, but it’s critical to enter into property investment with your eyes wide open when it comes to all the out-of-pocket expenses you’ll incur along the way.
Examine each potential investment analytically and ensure you make adequate allowances.
By underestimating your income and overestimating your expenses you’re more likely to avoid any nasty surprises.
8. Financing faux pars
As you progress through your property journey you’ll realise that real estate investing is a game of finance with some houses thrown in the middle.
So the best advice I can give any beginning property investor when it comes to financing your property investments is to seek help from a qualified, professional mortgage broker.
Going it alone can be daunting and time-consuming and obtaining the right type of finance can save you thousands in the long run.
Setting up an incorrect financial structure can be just as detrimental to your investment endeavours as selecting the wrong type of property.
There are numerous considerations to make here and a good broker who understands investment will be able to guide you in the right direction.
9. Being less than thorough
So you’ve found the right property and you’re ready to make a move.
Have you really done every little bit of research into the investment?
Do you know why the vendor is selling?
Knowing the vendor’s motivation can make a big difference when it comes to negotiating a good price.
During the initial inspection look for clues as to the vendor’s personal situation; are they going through a divorce for instance?
While it might sound a little callous, this gives you an opportunity to buy a bargain, as well as giving the seller a chance to move on with their lives.
Have you had the relevant inspections done to uncover any structural defects or signs of pest infestations, like termites?
The fees for these are tax-deductible and paying say $800 for this type of peace of mind can save you thousands in the long term.
Finally, is the property liveable from a tenant’s perspective?
Remember, while you won’t be living here, someone else will, and they’ll be paying you to do so.
Ask yourself, is the floor plan appealing, and will the property provide a comfortable, practical home?
Always do a second and third inspection at different times of the day.
Is it noisy during peak hours? How does light work at different times? Are the neighbours party animals or quiet?
Ticking all of the right boxes when you inspect a property will ensure you buy the best possible investment every time.
10. Saving by self-managing
You’ve done all the groundwork and secured the perfect property investment…now the hard work really begins!
Many investors think about self-managing their portfolio; that is finding their own tenants and acting as their own property managers by organising the collection of rents, maintenance, etc will save them a packet and give them greater profit.
Wrong, wrong, wrong!
In the short term, this might seem plausible enough, but what happens when you have a portfolio of say twenty properties?
The ongoing management of such a portfolio essentially amounts to a full-time job!
You have to find and qualify suitable tenants, know the laws pertaining to renting, have a firm grip on the value of your rental, conduct regular inspections to ensure your tenants are looking after your asset, collect the rent, represent yourself at tribunal should things go awry, deal with all the maintenance issues that crop up and be on call 24/7 for your tenants.
Sound appealing? I didn’t think so.
Paying a professional property manager to handle all of these things on your behalf will not only mean you get the best outcome for your rental property in terms of a good tenant and the best possible returns, but it will also give you something just as valuable as money when it comes to investing – time.
All of that time spent managing your properties could be put to far better use…finding more investments to add to your portfolio and generating even greater wealth.
Now we’ve gone through what NOT to do when property investing is in some detail, let’s look at what to look out for.
READ MORE: 8 risks all property investors need to face up to
Investing in property vs other asset classes
Whilst some caution that you shouldn’t put all your eggs in one basket, many Australians prefer to invest in real estate because of its distinct advantages over other asset classes.
Investing in shares may yield attractive long-term returns, but it is considered to be more volatile and unpredictable than the property market.
Hence, it doesn’t sit well for low-risk takers, especially those who have no idea how the share market works.
Though you can study the share market, it still requires specialist expertise to know how to invest and invest wisely.
This can be very costly. It’s also possible to make huge losses virtually overnight in the share market, whereas property is a more consistent asset class.
Investing in term deposit savings accounts entails low risk, but it also yields minimal rewards.
One of the big benefits of investing in residential real estate is that the market is dominated by non-investors (homeowners) who don’t think like investors and add stability to residential real estate prices.
READ MORE: Investing in Australian Shares vs. Property
How to make money through property investment
Knowing how to invest in property is the key. 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.)
- Cash flow – 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 cash flow, decrease your tax obligations and increase your bottom line.
- Accelerated growth – Getting your hands a little dirty (metaphorically speaking) by purchasing 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.
- Inflation – Property investors have learned it’s too hard to make money using your own money. Instead, they have learned to use other people’s money to leverage and gear. In other words, they take on a mortgage. However, over time inflation erodes the value of the mortgage. For example, take a $400,000 mortgage on your $500,000 property today – in 10 years’ time your property could be worth $1 million and you still have a mortgage of $400,000 (assuming interest-only payments) however in 10 years’ time your $400,000 won’t be worth as much as due to inflation.
Property investment phases and strategies
When learning how to invest in real estate, it’s important to understand the three stages of building wealth through the property from the get-go, which are:
- Accumulation phase: This is the stage where you build a portfolio of high-growth “investment grade” properties, usually over a 10 – 15 year period.
- Consolidation phase: The consolidation phase involves slowly reducing the debt on your properties, which conversely increases their cash flow when you need it the most.
- Lifestyle phase: This phase is all about enjoying your life and living off the cash machine you have produced in the first 3 phases.
READ MORE: The 8 Best Property Investment Strategies in Australia
Capital growth or cash flow – which is better?
When it comes to real estate investment you’ll often hear two somewhat conflicting philosophies being bandied around.
A common question beginning investors ask is – which is better?
Firstly, there are the “Cashflow” followers; they suggest you should invest in property that has the capacity to generate high rental returns to achieve positive cash flow.
In other words, you want rental returns that are higher than your outgoings (including mortgage payments), leaving money in your pocket each month.
Then there’s the “Capital Growth” crew.
Their favoured strategy is to invest for capital growth over cash flow.
In other words, you need to buy a property that produces above-average increases in value over the long term.
Note: Investment properties in Australia with higher capital growth usually have lower rental returns.
In many regional centres and secondary locations, you could achieve a high rental return on your investment property but, in general, you would get poor long-term capital growth.
Having said that, there’s no doubt in my mind that if I had to choose between cash flow and capital growth, I would invest in capital growth every time.
It’s just too hard to save your way to wealth, especially on the measly after-tax positive cash flow you can get in today’s property market.
So the first phase of wealth accumulation is the stage of asset accumulation.
And in today’s low-interest-rate environment, the cost of holding the property is the lowest it’s ever been.
My advice for budding investors is to understand that wealth from real estate is not derived from income because residential properties are not high-yielding investments.
Real wealth is achieved through long-term capital appreciation and the ability to refinance to buy further properties.
If you seek a short-term fix with cash flow-positive properties, you’ll struggle to grow a future cash machine from your property – it’s just that simple.
But here’s the trick…
You can’t turn a cash flow-positive property into a high-growth property, because of its geographical location.
But it’s all about knowing how to invest in property that can achieve both high returns (cash flow) and capital growth by renovating or developing your high-growth properties.
This will bring you higher rent and extra depreciation allowances, which convert high-growth, relatively low cash flow properties into high-growth, strong cash flow properties.
This means you can get the best of both worlds.
Put simply… Cash flow keeps you in the game while capital growth gets you out of the rat race.
READ MORE: Why Capital Growth Beats Cash Flow Every Time
Pros and cons of investment property
Compared to other forms, property investing is a safe and proven method for growing your wealth.
The pros
1. Strong historical performance
Residential property outperformed all other investment types, including shares over the past 20 years.
2. Control
Property is a great investment because you have direct control over the returns from it. One of the major benefits is that you can manage your assets rather than leaving the decisions to a large corporation or fund manager. What this means is, that you can improve your property or buy a property with a twist that will give you quick capital growth. If your property is not producing good returns, you can add value through renovations or adding furniture to make it more desirable to tenants. In other words, you can directly influence your return by taking an interest in your property and understanding and meeting the needs of your prospective tenants.
3. Leverage
One of the special things about the property is that banks will lend you up to 80% of the value of the property, enabling you to use other people’s money to buy larger amounts of your investment.
4. Tax advantages
Investment properties offer large tax advantages including depreciation and the possibility of negative gearing if it is appropriate for you.
5. Security
It is often said that residential real estate offers the security of bricks and mortar. What this means is that houses don’t “go broke” as companies or shares do. This is partly due to the size of the residential market and also the fact that just under 70% of the people that own properties are not investors, but are owner-occupiers. The residential market is the only investment market that is not dominated by investors and this provides a built-in safety net.
6. Income
The rental income you receive from your property allows you to borrow and get the benefits of leverage by helping pay the interest on your mortgage.
7. Property is forgiving
Even if you bought the worst property at the worst possible time, chances are it will still go up in value over the next years. History has proved that real estate is possibly the most forgiving asset over time. If you are prepared to hold an investment property over a number of years it is bound to rise in value.
8. You can insure for many of the risks
Not just building insurance, but smart investors take out landlords’ insurance to protect their interests.
The cons
Property investments are not all rainbows and lollipops, there are some cons associated with investing in real estate:
1. High entry costs
With property prices constantly on the rise it continually gets harder and harder to get into the market. These high entry costs keep a lot of investors out and make it hard to begin if you don’t have a savings discipline and a bit of money behind you.
2. Lack of diversification
Because of the high entry cost it is common for beginning investors to have all their eggs in one basket. This lack of diversification is a risk if the market changes suddenly or your investment doesn’t perform the way you expected. Of course, the answer to this is to own the right type of real estate, the type that doesn’t fluctuate in value significantly when the market turns. (I’ll explain this in more detail shortly.)
3. Ongoing and additional costs
Investment property carries with it ongoing costs like insurance costs, council rates, mortgage repayments, maintenance, renovations, etc. These expenses may be regular or may come as a surprise when you least expect them. And if you own a high-growth property, it is likely that in the early years the rental income will not be able to completely cover your expenses. While many investors top up this negative cash flow from their savings, savvy investors set up cash flow buffers in a line of credit or offset account to cover their negative gearing.
4. Tenant problems
Despite engaging the best property managers to look after your property, you can still have tenant problems or periods of rental vacancy, which unless you have the protection of landlord insurance or cash flow buffers can put a dent into your finances.
5. Property is illiquid and lumpy
It takes time to sell and you can’t simply sell off one part of the house and convert it to cash.
6. Surprises
These always seem to creep up on investors – things like changing interest rates or unexpected repairs.
READ MORE: The Pros and Cons of Property Investment
Which is the right property to buy?
There are several real estate investment types in the market that you can choose from as an investor.
One of the most popular is the freestanding house, which serves as a great home for tenants looking to raise a family.
A moderate-sized family home in the right suburb that is pet-friendly and with a fenced backyard often commands a high price in the rental market and delivers consistent capital growth because it is in strong demand by owner-occupiers.
However, our changing demographics mean more families are trading their backyard for a balcony, so if you want to target singles, couples, students, young professionals, and retirees, you could invest in a unit or apartment that best suits their busy lifestyles.
The location is of utmost importance in these properties, as tenants prefer a place that is close to their university or workplace and is easily accessible to public transport.
While some people invest in a holiday home, in my mind these make poor investments as they are in seasonal demand and may remain untenanted for long periods of time, and their values fluctuate considerably depending upon the general economic cycle.
You see…when times are tough no one really wants to (or can afford to) buy a holiday home.
There are also:
- Townhouses – an increasingly popular style of accommodation for a wide demographic
- Villas – these make great investments because they are “landed properties”
- Blocks of apartments – these are scarce, but sound investments for those with deep pockets
- Student accommodation and serviced apartments – make terrible investments
- Enough said
- Commercial and Industrial real estate – sound investments for sophisticated investors who already own a substantial residential property portfolio
Understanding the market for each type of investment property is the key to knowing how to invest effectively. It’s also worth seeking market updates from a real estate agent and investment advice from a buyer’s agent.
As an investor, it’s important to understand that location does most of the heavy lifting for your real estate investment success.
Around eighty percent of your property’s performance will be due to buying in the right location and the balance by owning the right property, an “investment grade” property that suits the fundamental demographic in that location.
That’s why I suggest following my advice of a strategic top-down approach to finding a property that will outperform the general market.
- I start by looking at the macroeconomic environment – the big picture of how Australia’s economy is performing and in general, the outlook is good – especially in the eastern states.
- Then I look for the right state in which to invest – one that will outperform the Australian market averages because of its economic growth and population growth. It is likely that both Sydney and Melbourne will strongly outperform the other states – they’re forecast to deliver around two-thirds of the new jobs over the next few years.
- Then within that state, I only invest in the capital cities and not in regional areas – again because that’s where the bulk of the jobs will be created and where most people are going to want to live. I would look for the right suburb for your investment property – one that has a long history of outperforming the averages. It’s all about demographics, as these suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals will be prepared to, and can afford to, pay a premium to live because they have higher disposable incomes. In general, they’re the more affluent inner- and middle-ring suburbs of our big capital cities, so I check the census statistics to find suburbs where wage growth is above average.
- Then I look for the right location within that suburb. Some liveable streets will always outperform others and in those streets, some properties will always be more desirable than others and outperform the investments by increasing in value.
- Then within that location, I choose the right property, using my 6 Stranded Strategic Approach.
- The finally… I would buy it at the right price. I’m not suggesting you look for a “cheap” property – there will always be cheap properties around in secondary locations. I’m suggesting you look for the right property at a good price.
So how do they know which is the right property to buy?
My property investment advice is to follow the 6 Stranded Strategic Approach:
- I would buy a property that would appeal to owner-occupiers because owner-occupiers will buy similar properties pushing up local real estate values. This will be particularly important over the next few years when the percentage of investors in the market is likely to diminish.
- I would buy a property below its intrinsic value – that’s why I would avoid investing in new and off-the-plan properties that come at a premium price.
- I buy a property with a high land-to-asset ratio – but this does not necessarily mean a large plot of land. Well-located apartments have an attributable significant land component under them.
- In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. 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.
- I look for a property with a twist – something unique, special, different, or scarce about the property.
- I buy a property where I can manufacture capital growth through renovations or redevelopment rather than relying on the market to do the heavy lifting.
By following my 6 Stranded Strategic Approach, I minimise my risks and maximise my upside.
Each strand represents a way of making money from property and combining all six is a powerful way of putting the odds in my favour.
If one strand lets me down, I have four or five others supporting my property’s performance.
When you look at it this way, property investment strategy takes a lot of time, effort, research, and something most investors never attain – perspective.
This is invaluable in knowing how to invest in real estate.
What I mean by this is that if you can gain a lot of knowledge over the Internet or by reading books or magazines but what you can’t gain is experience.
It takes many years to develop the perspective to understand what makes an investment-grade property.
That’s why I recommend employing a property strategist to guide them.
By the way… this is not a buyer’s agent, even though a buyer’s agent will be involved eventually to purchase the property.
In fact, in today’s challenging environment, it is more important than ever to have more than just a property strategist, but a team of advisors who take a holistic approach to your wealth.
By the way…that’s what we specialise in at Metropole.
We take a macro view of your needs and will build you a customised, personalised Strategic Property Plan, and then we will help you implement this strategy by coordinating the various consultants including a buyer’s agent.
READ MORE: Where should I buy my next investment property in Australia?
Understanding property market cycles
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 the property is out of favour.
That’s why Warren Buffet said, “Be fearful when others are greedy and be greedy when others are fearful.”
Having said that, over the years I’ve changed my view on timing the market, especially if you’re an established investor.
If you’re into real estate for the long haul (and that’s really the only way to play the property game) then time in the market (owning a property that will outperform the averages in the long term) will trump timing the market (making a one-off capital gain, but then often missing out on strong, long term growth because you’ve bought in the wrong location).
Note: Time in the market is what delivers the most capital growth.
As you can see from the graphic below, if your $500,000 investment property increases in value by 7% per annum, it will be worth almost $1.4 million in 15 years’ time, but almost half of this capital growth will occur in the last five years.
This means the sooner you start your real estate investment journey the better because you’ll have time and compounding working longer for you.
READ MORE: What makes property prices rise and fall
Houses vs. apartments
Over the last few years, houses have outperformed apartments so many are wondering are apartments still a good investment:
- Capital growth has been stronger for houses than apartments
- Rental growth has been stronger for houses than apartments
But these are big picture “overall” stats – some apartments, especially family-friendly low-rise apartments in lifestyle neighbourhoods have still performed well while high-rise CBD apartments have performed very poorly with significant vacancies (up to 30% in Melbourne), falling rents, and falling values with few buyers interested in these.
If you can afford a house in a good location, then that’s probably the way to go.
But if your budget doesn’t allow you to buy a house in the right location, I’d rather own a “family-friendly” apartment in a good suburb, than a house in the outer suburbs.
I’ve already explained that around 80% of your investment’s performance will be due to its location and about 20% due to owning the right property in that location.
For many investors, apartments offer an affordable entry point into the property market.
Financial advisor Stuart Wemyss conducted a performance review of investment-grade apartments.
He concluded:
- Following a period of relative underperformance compared to the freestanding housing market, current apartment prices do not reflect an inherent underlying value underpinned by recent land appreciation.
- There is a high likelihood of significant price growth in the coming ten years to rectify the current misalignment, making the right type of apartments (family-friendly medium and low-density apartments in lifestyle suburbs – not the CBD) an asset worth holding onto or considering investing in.
- Implied land values indicate that apartments are currently intrinsically undervalued. Houses have displayed strong capital growth rates over the past eight to 10 years due to appreciating land values. Logically, therefore, despite limited price growth recorded during the same period, apartments (which tend to have a 45-55% land value component) must also be worth more. In fact, intrinsic land values implied by house price growth during the previous seven years suggest that apartments may be fundamentally undervalued by 30-40%.
New vs. old investment properties
Just like the houses vs apartments debate, old and new properties each have their own benefits.
Let’s face it when it comes to buying big-ticket items we all love new, shiny things, but without a doubt, for the majority of investors, established properties will always offer far better capital growth potential than a new build for a whole number of reasons.
So let’s take a look at the benefits of old versus new.
1. A better deal
When you buy a new investment property, you’re not only paying for the property, but you’re also handing over a premium to the developer for their profits and marketing costs.
Essentially, you are handing your first few years’ worths of capital growth straight to the developer!
With established properties on the other hand, when you buy right you end up paying below intrinsic value cost.
2. Value-add potential
Obviously, when you buy a new property everything is already done for you and while this might seem appealing, it is actually a huge disadvantage.
The problem is you have sacrificed the potential to add value, or “manufacture” capital growth, that comes with an established house or apartment.
At Metropole, the ability to add value is one of the primary attributes we look for in an investment property.
3. Better than an educated guess
One of the most critical factors when it comes to investing advice in real estate is to know your market.
However, a new building doesn’t come with a track record of property price growth to help you make an informed decision when it comes to pricing.
And don’t pay too much attention to what other inexperienced investors have already paid to buy into the complex – most will have overpaid and lost out in the long term.
4. Stronger performer in a slower market
One of the big issues with new and in particular off-the-plan properties is that when the market slows, so too does your rate of growth.
New apartments and houses are often the first to see prices soften when the overall market loses momentum.
Often though, established homes will either maintain their value or experience a very minimal adjustment.
Note: Investing is really a game of finance so, when it comes to good property investment advice, a sound financial strategy is just as important as a sound investment property strategy.
Without a well-rounded understanding of how to maximise your borrowing power, use equity to buy your investment, build your portfolio and maintain a financial buffer to see you through the difficult times that we all ultimately face, you’re setting yourself up to fail financially.
This will often mean taking an interest-only loan for your properties, because rather than paying the principal back each month (lowering your debt); the extra cash flow could be used to service a bigger debt and support a larger property portfolio.
Common expenses real estate investors must pay
Topping the list of the most common property expenses for investors is loan repayments, the amount of which varies depending on the borrowed amount, loan type, loan term, and loan service fees.
As you continue to hold and maintain your investment property, you may also need to pay for land tax and council rates, which vary by government area.
For apartments and townhouses, there are also body corporate fees paid quarterly to assist in their upkeep.
Building and landlord insurance are a must in limiting the financial impact of unforeseen circumstances, like sudden damage costs and tenant-related liabilities.
Other fees to take into account include property management fees, advertising for new tenants, and repair and maintenance costs.
How much should you budget for repairs and maintenance?
One of the most difficult aspects of property management is anticipating the costs of maintenance and repairs.
They can occur at any time, plus the expenses vary greatly depending on the age of the building, the nature of the repair, and any insurance policies in place.
Furthermore, sometimes these costs are not tax-deductible.
Repairing an item – such as a cupboard door – is tax-deductible.
However, improving the same item – such as replacing all cupboard doors with a newer, more modern style – is considered a renovation, which is not immediately deductible.
To create a budget for repairs and maintenance, it’s a good idea to estimate how much it might take to replace the ‘big ticket’ items throughout the property, such as dishwashers, hot water systems, and carpets.
Determine their current age and life expectancy.
Based on those figures, calculate the remaining life expectancy of the item.
Rank all the items in order of increasing estimated remaining life expectancy, and plan accordingly for these anticipated expenses in the next five years.
Property investing and tax
One of the biggest reasons why investment property remains popular in Australia is the whole raft of tax benefits available.
Now my advice is that you shouldn’t invest solely for tax benefits, but they’re a nice little bonus that makes keeping your property easier.
Things like claiming legitimate business expenses of running your investment business as well as negative gearing, which allows investors to offset any shortfall between the rent that you collect from your property and the expenses that you pay for it against your other income.
However, if you sell a property at a profit you’ll need to pay capital gains, but even this has adjustments, as you can currently benefit from a 50% discount on capital gains for a property that you’ve held for longer than 12 months.
READ MORE: How does owning an investment property affect taxes?
Property management
Renting out your property allows you to earn an income from your investment, but you really need to employ a proficient property manager so that your investment property is well-maintained and continuously tenanted.
Your property manager is responsible for a number of things, such as advertising your property, receiving enquiries during the leasing process, and screening and selecting tenants. They also help to make sure that your property is maintained, with repairs and updates performed as needed.
Most importantly, as your property manager is responsible for collecting rent, they follow a clear process in accordance with the law.
Aside from the initial fees that you need to pay when buying an investment real estate, you also have ongoing costs like council and water rates, insurance, body corporate fees, land tax, property management fees, and maintenance and repair costs.
These expenses are usually tax-deductible.
When it comes to insurance, you must not only take out building insurance, but you should also consider landlord insurance because this will protect you if a tenant damages the property or leaves without paying rent.
Repair and maintenance costs should also be factored into your budget.
Should you manage your property yourself to save money?
Sure you can get rid yourself of property management costs if you choose to manage your investment property yourself, but in my mind, this is a sure way to disaster.
Property managers can set the right market rental rates and collect rent payments on time.
They can also advertise your property astutely to avoid long vacancies.
When it comes to tenants, property managers can screen them and manage all aspects of the landlord-tenant relationship.
They also often have connections with contractors, suppliers, and maintenance workers, if ever you need one.
Property managers are also knowledgeable about housing regulations and property laws, so you can be sure that your properties are always complying with them.
What are the risks and how can they be minimised?
1. Market risk
The property market moves in cycles and at times there are external factors that cause a market-wide slowdown or downturn.
Investors who focus on a long investment time horizon weather these storms as capital city markets eventually correct and recover.
However, at this stage of the property cycle, it is likely that the value of well-located capital city properties is likely to keep increasing with little general market risk for A-grade homes and investment-grade properties.
2. Liquidity risk
Liquidity is the ease with which you gain access to the money you have within an investment.
One disadvantage of real estate investments is the lack of liquidity compared to other types of investments. Your situation may change abruptly due to a change in life circumstances, but you may be stuck with your property for several months or years, depending on the local market cycle and your financial situation/requirements.
3. Interest rate risk
A rise in interest rates will affect variable-rate mortgages, meaning the cost of your debt can increase as interest rates climb, putting a strain on your cash flow.
However, the risk of interest rates rising over the next couple of years is very unlikely considering the firm “guarantees” given by Dr. Philip Lowe, governor of the RBA.
4. Buying the wrong property
Most properties are not “investment grade” and if you didn’t do enough due diligence and buy the wrong property in the wrong area at the wrong time, you could face years of slow or no growth or worse, no income due to a high vacancy in the area.
5. Cash flow crunch
If your tenant leaves you could face a cash flow squeeze for a short while and if you lose your job you may be unable to top up your rent to meet your mortgage repayments.
6. Currency risk
Foreign buyers who are investing in property in Australia are also subjecting themselves to currency risk, which is dependent on the movement of the Australian dollar.
7. Legislative risks
There are also sovereign or legislative risks in the property market, as any unfavourable government action can result in investment losses.
A good example of this is the possibility of changing negative gearing rules – which seems to come into discussion each year around budget time – a move that would substantially increase investor confidence.
As you can see, any investment property strategy involves some level of risk.
So knowing how to invest means knowing how to minimise these risks.
One way of minimising their risk is to have a financial buffer in place (with funds in an offset account) for your personal needs as well as for any unexpected investment expenses.
This will allow you to keep their properties well maintained and cope with any unexpected maintenance or vacancies.
All property investors should also consider taking out income protection and life insurance as well as landlord’s insurance to protect their interests.
Of course, the reason behind this recommendation is that one of the most important factors in an investor’s ability to keep growing their property portfolio is the ability to service their loans and use their income to supplement the rental shortfall in the early years.
Note: Without an income, you may not be able to hold on to your properties.
Similarly, if you die, you would need to consider how your spouse would be able to continue holding the investment properties.
So, I suggest you need to make sure they have insurance to sufficiently cover mortgage repayments if the worst should happen.
I’d also recommend that you seek advice from an accountant before purchasing an investment real estate to ensure you buy it in the most tax-effective manner.
Once you’ve bought your investment property you’ll need to arrange an investment property depreciation schedule to ensure you claim the most in deductions.
And no matter your age, it’s wise to consider estate planning because, while we never like to talk about it, it’s important to plan to look after your family after you’re gone.
This means you should see a solicitor and prepare a will, choose executors, and organise a power of attorney.
Finally, it’s important to treat your investments like a business and regularly review your portfolio with your property strategist to track its performance, ensure you have the right loans and best interest rates, and assess when you’re ready for your next acquisition.
Is it too late? Have I missed the boat?
The simple answer – NO, it’s not too late.
Of course, it would have been nice to buy a property 10, 15, or 20 years ago.
And yes it would have been great to buy a property in early 2020 when most people sat on the sidelines waiting to see what would happen in the market.
And sure our markets are correcting, but they’re not going to crash and it’s important to remember that there is not one “Australian property market” and even within each state, there are multiple markets, divided by geography, type of property, price point, etc.
Note: Property investment is a process – not an event.
That means to become a successful property investor you can’t just go out and buy any property. It should be part of a long-term Strategic Property Plan.
It should come as no surprise that getting a good team around you will be an important investment and not an expense and should allow you to build a property portfolio that will go a long way to replacing their income in the future.
At the same time, you must learn that property investing is not a get-rich-quick scheme and to achieve your future financial goals you will have to slowly build a substantial asset base and not chase short-term cash flow as many beginning investors do.
Here are a few other final tips so you’ll know exactly how to invest:
- Formulate a plan: understand your end goals – 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’ve maintained it through a number of property cycles.
- Understand the difference: between a salesperson and an advisor. Many salespeople are cloaked as advisors and while they suggest they’re representing you, in fact, they are representing the seller or a property developer. Only take advice from someone who is independent and unbiased rather than someone who is trying to sell you something.
- Be prepared to pay for advice: I’ve found that good advice is never expensive. In fact, it’s much cheaper than learning from your property investment mistakes.
- Not everything that glitters 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.
The property doesn’t discriminate; it doesn’t care who owns it.
The residential property market is worth well over seven trillion dollars today 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.
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