Looking at buying your first investment property? Or maybe your next one?
I’m sorry to say, but there’s no generic, one-size-fits-all approach to property investment.
Residential real estate, as with any other investment vehicle, requires an individualistic approach.
In other words, you must identify and address your own specific needs, goals, and circumstances in order to achieve the success you aspire to.
Having said that there are certain ‘rules of thumb’ which when applied, can make your journey that much more fruitful and the road to reach your investment objectives a lot less rocky.
Michael has previously covered 10 things to consider when buying an investment property.
But I'd like to give you my own personal tips.
So here are 7 ways you can grow a substantial property portfolio to give you choices in life, whilst minimizing your risks…
1. Plot your course and stick with it
This is the first essential step when you set out on your property investment journey.
Find a proven property investment strategy that aligns with your risk profile, goals and time frame.
Steer clear of the get-rich-quick schemes - in my experience winning strategies lend themselves more to the tortoise pace of slow and steady.
It might not be as sexy, but I believe those starting out should consider:
Buy and hold – this involves leveraging the complementary mechanics of equity and time.
This includes an acquisition phase, where you add high growth, quality assets to your portfolio and then hold them for the long term allowing your capital gains to give you extra equity for your next purchases.
Once you’ve built a substantial asset base you can then transition into the cash flow stage of your investment journey.
Buy, renovate & hold – as above, but here you have the opportunity to “manufacture” capital growth and speed up the growth of your portfolio.
This is achieved by acquiring ‘fixer-uppers’ in desirable locations (i.e. worst house or apartment, in the best street, in the best suburb) and undertaking cosmetic improvements to increase your property investment’s capital and rental value.
2. Establish a property investment ‘peer’ network
I always recommend that investors surround themselves with experienced professionals who can add significant value to their journey.
And while you undeniably need a property savvy accountant, solicitor, finance broker, property strategist, and a mentor (someone who has been there and done that), it’s just as vital that you connect with like-minded individuals who are also dipping their toes in the proverbial property waters.
Networking is a no-brainer these days, with numerous social media forums and blogs you can subscribe to that have threads on virtually every imaginable real estate topic.
In many instances, experienced property investors are more than happy to connect with newbies online and share their mistakes and successes.
Many have LinkedIn and Google Plus accounts to make reaching out even easier.
Seminars shows, and presentations can be another great way to meet like-minded people who can keep you accountable and on track.
However, be careful who you listen to for property investment advice – Pete Wargent wrote a great blog suggesting which property “experts” you should listen to and who to be wary of.
3. Crunch the numbers…twice!
I know it seems obvious, but it’s imperative that you have a good financial footing when you first venture into property investment.
After you run your numbers based on today’s interest rates, account for future upward adjustments of at least 2 percentage points and run them again.
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We are currently in a very fortuitous, low-interest-rate environment that has encouraged many beginning investors into the game.
But I wonder how many have calculated whether they can afford to hold onto their assets when interest rates invariably move back up into the 6’s and 7’s?
It may not happen for a while but it most likely will again someday.
4. Know your target market and give them what they want
Property investment is a business proposition.
As such, you need to be well aware of your target demographic when it comes to ‘selling’ your product.
While tenants pay your rent and assist with that all-important cash flow to sustain your portfolio, owner-occupiers are the market force that ultimately determines the value of your investment property.
When purchasing an investment property, you need to be fully versed in who the tenants and homebuyers in that location happen to be.
Then it’s about selecting the appropriate property that appeals to both groups, in order to maximise your long-term capital gains (because owner-occupiers like that type of property and rental returns (to manage those mortgage repayments.)
For instance buying a one-bedroom apartment in the outer suburbs, where the predominant residents are young, growing families, isn’t really a smart investment decision.
5. Be well informed about negotiation and the purchasing process
Knowing how to negotiate not just the final sale price, but also various contract terms, is an important aspect of property investment.
You’ll find that in property everything is negotiable – not just the purchase price, but also the deposit, the settlement terms, what’s left in the property, etc.
Of course, while everything is potentially negotiable, don’t get too carried away and complicate the deal so much that you lose out on a good buy by making your offer unattractive to the purchaser.
6. Capitalise on property investor ‘tax perks’
While you should be investing for capital growth, cash flow is an essential component of any well-rounded property investment portfolio.
Failing to maintain a healthy bottom line means putting your entire asset base at risk.
Now that doesn’t mean you invest in cash flow positive properties.
Instead one of the ways you can maximise your cash flow is by taking advantage of the various income tax incentives available to residential real estate investors.
Speak with your accountant to make sure you maximise your legitimate tax deductions as well as depreciation allowances.
7. Don’t make it personal
This is harder than it seems, because while most of us have experienced property from an emotional place in the past – as our own home in which we create memories with loved ones – we have not made bricks and mortar purchases purely from common sense, financial perspective.
To invest strategically it’s essential that you remove your heart from the equation though.
This isn’t about your personal taste, but about appealing to that target market we discussed earlier.
You need to see housing as a commodity with the potential for profit and revenue.
It’s not about whether you like the carpets and curtains.
At the end of the day, property investment is a numbers game.
Approach it with sound logic and a detached, objective eye, basing your decisions on an investment strategy aligned with who you are, where you are, and where you want to be in the future, and you’re well on your way to success.