Property investment is not something you should ever 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 some tenants in it to pay the mortgage and make a killing!
How hard can it be?’
The fact is if you’re considering getting started in property investment, you probably have at least a good six months to a year of hard yards to put in before you even think about signing on the dotted line and securing the first asset for your portfolio.
Sure, you can jump in feet first, but there’s something to be said for that old adage – fools rush in where angels fear to tread! – and let’s not forget the gem that reminds us ‘patience is a virtue’!
So here are some words of wisdom from an industry insider that you’d do well to heed if you want to play the property investment game.
Knowledge is property investment power!
First and foremost, before you do anything else, you will need to understand what makes a good property investment and recognise that not just any old digs will do.
Regardless of what you might be told by well meaning friends or family, the truth is there are four key ingredients required to make money from bricks and mortar and like a good soufflé, you have to combine them all in just the right way if you want to enjoy real wealth.
- Capital Growth – your investment must have a proven history of above average appreciation due to the location & demand.
- Cash Flow – you have to manage this correctly with every investment, including getting the right tenants and rental income as well as creating a cashflow buffer and avoiding over-capitalising on a property you can’t afford.
- Tax benefits – while you should never invest solely for this reason, a good tax strategy can help you manage cashflow, decrease your tax obligations and increase your bottom line.
- Accelerated Growth – getting your hands dirty (metaphorically speaking) by investing in a property that needs a bit of cosmetic TLC with minor renovations or trying property development (for the more advanced investor) is a great way to jump a few rungs of the property ladder on your way to the top.
While timing the property market is not the be all and end all, it certainly helps to know when you should never invest and when you should always be prepared to invest in the right property.
Following the herd and buying when everyone else is on the property bandwagon is an ill-advised move.
When things are slow, you have more chance of nabbing a great deal without having to worry about competing against other homebuyers and investors.
Many millionaires have made their riches by going against the tide and taking calculated risks – remember fortune favours the brave!
Supply, demand and scarcity
Location can make or break a property investment.
But what is the right location?
The only way you’ll be able to answer that question is with research.
You need to find out about the historical movements of the local market, the primary demographic who lives there and ask yourself, is there more demand from homebuyers than there are properties for sale?
When demand outweighs supply, you have the prospect of good long-term growth, so if you buy in well-established, inner city areas where there’s very little capacity to create any new land and housing, you’re on to a potential winner.
Educate yourself by reading, attending seminars and engaging the services of an independent property strategist who knows the area you’re considering intimately if you want to save yourself some time.
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.
A lot of people think they can simply draw the equity from their own home and sink it into an investment property, but have you considered how the bank will look upon your loan application?
Do you have a respectable credit history and can you service the debt you intend to take on?
These are all the types of questions you have to ask yourself when it comes to financing a portfolio.
This is where an experience, proficient finance broker who understands property investment can be worth their weight in gold.
You can make all the money in the world through property investment and lose it just as readily.
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 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 investing some of that money into a good team of professionals who can guide you with their knowledge and expertise.
A buyer’s agent, finance strategist and 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!
Now for some 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 going to give you advice. Rather than listening to well meaning friends, it’s important to only listen to people who have achieved financial independence.
- Understand the difference between a sales person and an adviser. Many sales people are cloaked as advisers 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.