What price would you be willing to pay, to become a successful property investor?
Let’s face it, over the last decade of record low-interest rates and low levels of inflation, holding property has been relatively simple.
While there have been the ups and downs of normal cycles, with a pandemic thrown, it has been more about holding your nerve than anything else.
But the tide is now turning rather quickly.
With rapid-fire interest rate rises and inflation shooting to record highs, the cost to hold a property is also increasing.
My advice - prepare to get comfortable being uncomfortable.
Many investors will panic and some will not stay the course, choosing to exit as things become too uncomfortable for them.
Others will avoid investing altogether or target properties that are perceived to be neutral or positively geared to minimise any damage.
That will be a mistake.
There is either a price to pay today to become a successful investor or you’ll have to pay a higher cost in later life…lack of financial freedom.
Here are my thoughts and how to get through this stage of the cycle.
The New World Order
Higher interest rates and inflation look like they are here to stay, at least for the short to medium term.
Like previous cycles though, this too shall pass.
You must first come to terms with and accept this reality, before finding a way to get through to the other side.
There is no doubt, the costs of holding property will rise and many will choose to sell.
But if you are holding an investment-grade property, selling up would be a big mistake as it could delay or even cost you your financial independence.
Successful investors realise that it is time in the market that is most important.
The more time (preferably decades) in the market, the more your property can compound and increase to greater levels of wealth.
Other than simply selling your property there are other options you should consider.
1. Finance
Consider the way your investment property is financed.
Avoid using a bank or just an average mortgage broker, as your options may be more limited.
I would strongly suggest speaking with an independent finance strategist, they will be able to work in your best interests.
The most obvious thing to do initially is to see if they can find you a better interest rate.
In addition, it may be wise to discuss how the loan is set up to see if that would make a difference.
Are you paying Principal and Interest repayments or Interest Only on your loans?
Remember your priority is to hold this asset for the longer term.
Switching to interest-only repayments may reduce your repayments to cover the shortfall to avoid an unnecessary sale.
You can always switch back at a later stage, perhaps when rents have also risen higher.
2. Have a Financial Buffer
A buffer is a tool used by many sophisticated investors to buy time.
Understanding what your holding costs will be and then creating a buffer to get through the next 3 – 5 years.
For example, a $30,000 buffer may get you through the next 3 years if your holding costs are around $10,000 per annum or 6 years if they are $5,000 per annum.
Rather than borrowing to the max, a beginning investor could look at reducing their budget or purchase price and allowing some funds for a buffer.
Existing investors may choose to use their savings or look at refinancing and using a portion of the equity to buy time and fund the shortfall.
A buffer can also be a great risk management tool when preparing for a recession, or a GFC type of event because something unexpected will happen at some point in the future.
It is about preparing for the worst and hoping it never happens, rather than the other way around.
3. Cut Costs
If neither of these is an option the most obvious, but also the most uncomfortable, is to reduce your living expenses.
This option however is likely to be the least desirable and the most uncomfortable one.
It would mean doing something you may have not had to consider for a decade or more.
Living well within your means.
Many successful and high-level business and property mentors talk about saving a smaller portion of your wage for investing.
Whether it be 10% or even as much as 20%, unless you’re willing to pay a small initial investment in your future now, you will end up paying a higher price later.
It may not be in the form of dollars, but rather choices.
The choice to do what you want to do with your time, be it travel, spending more time with those you love, or following a hobby or passion project.
Many will lose the opportunity to create intergenerational wealth for future generations.
In my mind, it is a simple equation.
Am I willing to forego $5,000 or $10,000 now, to maximise my lifestyle and the benefits of greater wealth later?
In a world that is set up to maximise instant gratification, you must swim against the tide and practice delayed gratification.
Unfortunately, for too many people that can be a bridge too far with so much happening in the here and now, that they can’t delay gratification for the future.
A Big Mistake
Perhaps the biggest mistake we often see in this part of the property cycle is investors shifting their focus to cash flow.
I have spoken previously about why I feel cash flow-positive property is a con.
In short, a property is neither cash flow positive nor negative, it all comes down to the way that it is financed.
By changing inputs like deposits, interest rates, and the way a loan is structured, you can change the outcome.
One thing you should not change or compromise on is the location and capital growth of a property.
Cash flow will keep you in the game, while capital growth can be life-changing.
A capital gain of 20% - 30% in some locations over the last year would have taken most people many, many years to save.
An additional $5,000 or $10,000 additional cash flow simply does not compare.
The Bottom Line
Almost all property investors I speak with, have a goal to create some kind of financial independence.
But the vast majority are not willing to pay the price to achieve what they want.
Too many are not in the game to win – they are in the game not to lose!
If it were simple and easy with no risk, then everyone would be wealthy and successful.
Many are not willing to pay a small price today and as a result, will pay a much larger price when the time comes to retire.
It is as simple as making a choice, and then working out how to minimise risk, preparing and planning for the worst, so you can reach your long-term financial goals.
If you understand the rules of the game and have a long-term plan, you will greatly improve your chances of success.
You then must want it more than the distractions and temptations of the shorter term.
Taking comfort in knowing there is something bigger and better waiting for you at the end.
You need to plan your financial future
Attaining wealth doesn’t just happen, it’s the result of a well-executed plan.
Planning is bringing the future into the present so you can do something about it now!
Just to make things clear...buying an investment property is NOT a strategy!
It's important to start with the end game in mind and understand what you need and what you want to achieve.
And then you have to build a plan, a strategy to get there.
The property you eventually buy will be the physical manifestation of a whole lot of decisions that you will make, and they must be made in the right order
That's because property investment is a process, not an event.
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, I suggest you allow the team at Metropole to build you a personalised, customised 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.
Your Strategic Property Plan should contain the following components:
- An asset accumulation strategy
- A manufacturing capital growth strategy
- A rental growth strategy
- An asset protection and tax minimisation strategy
- A finance strategy including long-term debt reduction and…
- A living off your property portfolio strategy
Click here now and learn more about this service and discuss your options with us.
