There seems to be a disconnect between what is myth and reality when it comes to the number of investment properties that people own.
We sometimes hear about “greedy” investors who own dozens of properties when this is not really borne out by the facts.
Did you know that about 70 per cent of investors own one solitary property?
And of the 2.1 million property investors in Australia, only a tiny percentage – around 20,000 people as it turns out – own six or more investment properties.
Of course, only owning one investment property isn’t going to help you achieve financial freedom.
This means most Australians who try and secure their financial future through property investment fail.
So why don’t investors own more properties?
Well, generally it’s because they make one of the following mistakes, which stymie their chances of growing a portfolio.
Australians tend to love property, they love going to open homes and auctions.
They love the excitement of buying a property and renovating it.
They love the thought of becoming a property mogul.
In short…they’re having fun.
That’s not the way to become rich through property – you need a business mindset.
If you’re looking for fun go bungee jumping, go trail bike riding.
Property investment should be boring, but the results can make the rest of your life exciting.
If you treat property investment as a business you won’t think as much about each individual transaction, but the big picture – your long-term goal because property investment is a long-term process, not an event.
You’ll have a business plan which includes cash flow management, a finance strategy, asset protection, insurance, and correct asset selection.
Following on from the point above, owning an investment property is not a strategy.
The problem is, most people become property investors without putting much thought into it.
Some upgrade their home and turn their old house into an investment.
However, that doesn’t mean it will make a good investment because they probably bought it for emotional, rather than objective, reasons.
Others buy an off-the-plan property based on promises made by marketers, while others buy a property in their comfort zone – close to where they live.
Now don’t make the mistake many investors make and buy in your own backyard because you’re familiar with the location.
That’s really not a good reason to buy there.
In fact, a recent university study showed those investors who bought a property close to where they lived tended to buy underperforming properties and didn’t even get a price advantage on purchase.
You’ve heard it before – failing to plan is really planning to fail.
On the other hand, strategic investors devise a strategy – they bring their future into the present and devise a plan to achieve the results they want.
Almost as bad as having no strategy is following the wrong one.
Residential real estate is a long-term, high growth low yield investment.
Your strategy should be to use the capital growth of your property portfolio to grow a large asset base that will give you more choices in the future.
Yet many beginners chase cash flow or the next hot spot or try and make a quick profit by flipping.
All recipes for investment disaster!
Others chase tax benefits because they think negatively gearing new properties will “keep their tax down.”
So they buy a new house in an outer suburb or put a deposit on an off-the-plan unit due for completion in two years’ time, because of the higher depreciation deductions on offer.
The problem is that these properties just don’t offer the capital growth you require to grow your wealth.
Unfortunately, some investors get spooked when markets soften, and rather than sticking to a proven strategy to secure their wealth creation through capital growth, they opt for something cheap and supposedly cheerful instead.
- Also read:Predicted House Prices for Australia in 2030
- Also read:This week’s Australian Property Market Update – Latest Data, State by State February 27th 2024
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:5 ways I’m going to ensure my property investments outperform this property cycle
- Also read:Melbourne property market forecast for 2024
Rather than looking at what has “always worked” over the long term they look for “what will work now.”
It’s no surprise then that their smiles turn into frowns when that inferior property underperforms down the line.
The only time to change your strategy is when you had a significant change in your financial or life circumstances
Another reason investors fail is that they’re not patient enough.
They’ve read too many stories about “overnight successes” and go into property investment hoping to make quick profits or thinking they can buy seven properties in seven years, or possibly ten properties in ten minutes.
In reality, successful property investment is a get-rich-slow process.
It takes most investors up to 30 years to grow a big enough asset base to provide a cash machine for their retirement.
By then, though, many people have thrown up their hands and sold up because they had unrealistic expectations to start off with.
Too many investors look for that one big deal that will make them rich – property just doesn’t work that way.
As Warren Buffet wisely said: “Wealth is the transfer of money from the impatient to the patient.”
Successful property investors go through the following 5 stages of their journey:
- The education stage – learning what property investment is all about.
- The savings stage – they spend less than they earn and trap this extra cash flow in a saving account, to up a deposit to invest.
- The asset accumulation stage – it will take 2 or 3 property cycles to build a sufficiently large asset base of income-producing properties to move to the next stage…
- Lowering their Loan to Value Ratios - asset accumulation requires borrowing and gearing but eventually, your LVR must slowly come down so you can…
- Live off the Cash Flow from your property portfolio
Clearly, you need cash flow to hold your portfolio for long enough so that the power of compounding kicks into gear, meaning you must have a financial buffer to see you through the lean times.
Too many investors don’t recognise that property investment is a game of finance with some houses thrown in the middle and leaving themselves open to financial woes by not having rainy-day money that they can draw on when needed, which often results in them selling at a bad time.
The worst thing a property investor can do is to get it “right” the first time.
Show me a booming market and I will show you an investor with their chest puffed out like a proud property peacock!
They falsely believe that the rapid capital growth of their very first investment is because of their own brilliance rather than simply the result of a rising market.
They then buy their next property, the wrong type of property at the peak of the market – because they have the Midas touch remember – and become confused when the value of their property falls for the next few years.
The 24/7 news cycle is hard to ignore and beginning property investors tend to be driven by fear and greed which is what the media thrives on.
During booms when they should be the most cautious, FOMO (the fear of missing out) encourages them to pay too much and during the property slumps when real estate is available at a discount FOBE (fear of buying early) stops them from taking advantage of the opportunities available.
While the media keeps talking about “The Australian Property Market”, there are hundreds and hundreds of property markets within Australia and there are markets within markets.
Each state is at its own stage of its own property cycle and within each state, there are multiple property markets separated by geographic location, price points, and type of dwelling.
And each of these markets is performing differently based on local factors including demographics, economics and supply and demand.
So listening to market commentary about the Australian property market or even the Sydney or Melbourne property market is far from helpful.
There’s a reason estate agents keep going on about “location, location, location” but the problem is not all locations are created equal, and many investors don’t recognise the locational factors leading to capital growth.
Many chases the growth corridors touted by property spruikers when these are really regions of strong population growth such as new outer suburbs or locations where large high-rise towers are being built.
The problem is that the significant new supply of dwellings that are required to accommodate this strong population growth is the reason that these areas exhibit poor capital growth.
Supply is the enemy of capital growth.
Instead, a significant driver of capital growth is the strong demand and scarcity of accommodation in aspirational or gentrifying suburbs close to the CBD with good amenities, good public transport, and multiple lifestyle drivers.
In general, these will be locations where the locals have higher disposable income and are able to and prepared to pay more to live there.
Remember…the rich do not like to commute, while the poor will be flung further and further out to the extremities of our growing cities.
Even in the right location, not all properties are “investment grade.”
It’s important to own a property that has many of these attributes. It…
- Has owner-occupier appeal
- Is scarce in supply.
- Has a high land-to-asset ratio
- Has a twist – something unique and special about it
- Has the potential to add value
- Is attractive to the banks so they’ll be happy to lend against it.
Because everyone lives in a property, many novice investors believe that investing in real estate is easy, when it’s not.
They try to go it alone or fall prey to spruikers or marketers and soon they’re mortgaged to the hilt on a property that will struggle to grow in value enough for them to leverage from it.
On the other hand, savvy investors take responsibility for their own education, but they also understand that building a team of experts around them will help them succeed.
They know that they won’t ever know as much as the professionals and realise that it will take years and many transactions to gain true perspective.
So they formulate a strategic plan, get the right finance and ownership structures to suit their needs, and only buy investment-grade properties that will outperform the averages, and then regularly review their portfolio’s performance to ensure they are on the path to financial freedom.