7 lessons I wish I’d known when I started investing in real estate

They say hindsight is 20:20 – and that is certainly true when it comes to property investing.

Most of us start out without much knowledge behind us and only realise we are making mistakes when it’s too late to do much about them.

Here’s a list of seven things I wish I’d known when I was beginning my property investing journey, which you can implement to ensure yours is a much smoother ride.

1. Get the core principles right first

You’re not a multi-millionaire property mogul just yet, and while it’s nice to dream, it’s also essential you keep your feet on the ground when you’re starting out.

Many beginner investors try to over-analyse or time the market, thinking they are armchair experts when in fact they are operating well outside of their wheelhouse.

Instead, focus on the simple, basic questions.

• What is your property investment strategy? Capital growth (my preferred strategy or cash flow (where many beginners start and that's why their investment journey falters.
• What is the best entity in which to buy your property?
• What is your budget, your monthly spare cash flow, and your risk tolerance?
• Which areas are likely to outperform in the long term?

2. Accept that the perfect deal does not exist

Instead, set your sights on the best deal possible for your circumstances, with your budget in the current market.

Otherwise, you’ll become paralysed by inaction as you constantly search for something better, and we all know that if you keep doing nothing you’ll get nowhere.

As long as the property meets your investment criteria and represents a sound value in the current market, take the steps towards buying it – or you risk being in “research mode” for years.

The perfect deal is a myth, so look for a good deal because you make your money when you purchase your property by buying "the right property" - not by buying it cheaply.

3. It’s not a race to the bottom

Cheap properties that command relatively high rents might sound enticing, but these tend to be located in poor capital growth suburbs or in lower socio-economic areas and you should be wary of the potential pitfalls.

You’re more likely to attract tenants on low incomes who might struggle to pay rent, and crime and antisocial behaviour is often higher in these suburbs.

That doesn’t mean you have to invest in million-dollar properties in sought-after areas, but do stick to middle-income, family suburbs, even if you’re looking for a bargain.

Affordability pushes up house values  - but that doesn't mean you should buy cheap properties.

It means that people with higher-paying jobs can afford to buy new homes or upgrade their homes and areas where wages growth is higher than average experience capital growth that is higher than average.

So that's where you should be looking.

Leave the slums to the slum lords!

4. Have a slush fund

Smart property investors don't just buy real estate - they buy themselves time by having financial buffers in place to see them through the cash flow ups and downs of running a property investment business.

Appliances break, accidents happen and tenants go AWOL and leave you in the lurch.

Often you can’t predict these things, and Murphy’s Law is they’ll always happen when you’re least able to afford them.

Don’t rely on the credit card or mortgage redraw to cover these costs, and pay hefty interest in the process.

Always, always keep afloat for emergencies and repairs, ideally in a separate account so you can’t accidentally fritter it away.

An offset account is a great facility to use for this.

5. Get your head around the numbers

Accurate and realistic financial forecasting is essential to make the success of any business venture, and property investing is no different.

Make sure you’re accounting using long-term averages, not just the typical month’s expenses, so you have a buffer for things like council rates, land tax, repairs and maintenance.

Large expenses that happen infrequently.

6. Don’t underestimate the importance of proficient property management

Many first-time investors cringe at the thought of paying commissions to agents, but a good property manager can make or break your investment journey.

They’ll screen applications, deal with disputes, handle the repairs and even help you hang onto good tenants. Get this stuff wrong and watch your savings go up in smoke.

Plus, they are experienced and unemotional about the property.

For them, it’s purely business, which enables them to make clearer and smarter decisions, or at least, advises you on the best decision you can make.

7. Property is not a get-rich-quick scheme

Warren Buffet said: “Wealth is the transfer of money from the impatient to the patient”.

To become a successful property investor requires patience and persistence.

You must not only get started, but you must continue on and follow through.

Residential property is a long-term investment.

It’s not a get-rich-quick scheme.

Yet many investors speculate rather than invest.

They look for that “big deal” that will land them a jackpot in a short period of time.

In general, these types of deals rarely occur and if you find one, it will likely be speculative in nature and riskier.

The problem for many investors is that the successful buy-and-hold strategy I advocate is boring and others consider it slow.

But successful property investment is a long-term affair.

Many investors look for the latest fad or try finding the next hot spot or speculative growth area.

Other investors consider other types of investments with potentially higher returns.

When you are tempted to do this, remind yourself that real estate has been the number one long-term multi-millionaire maker throughout Australia’s history, yet most people that speculate on the latest fads have not made much money.

You don’t have to look for the latest fads or the latest speculative growth areas if you create your own capital growth by buying a good property at a fair price and then adding value through refurbishments, renovations, or redevelopments.

By doing this you are manufacturing your own capital growth and forcing up the value of your property.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.