Over the years, I’ve worked with thousands of investors and I’ve found that most fall into one of three categories.
I’m going to explain what those categories are and let you work out which one you fall into.
I’ll also explain why one of those categories tends to be more successful than the other two.
I’m also going to have a chat with Leanne Jopson, the national director of Metropole Property Management, about what you can do when a tenant doesn’t pay rent. Then, in my mindset moment, I’m going to share an uncomfortable truth.
What type of investor are you?
There are three main types of property investor. Which category do you fall into?
- Tend to spend little time looking for a property.
- Not really interested in understanding all of the ins and outs that go along with creating a property portfolio such as finance, tax laws, compounding and so forth.
- Rather than conducting any due diligence or consulting industry professionals for advice, they’re more likely to buy one of the first properties they come across
- Puts in some degree of work in order to find a good investment prospect.
- Gains a basic understanding of the principles involved in property, finance, and taxation.
- Tend to seek professional advice with regards to the structuring of their portfolio and conduct some due diligence in the hope that they can increase the likelihood of making a viable investment purchase.
- Tends to run around for months, sometimes even years, examining every nook and cranny of our property markets, endlessly comparing values and sales, reading reams of material regarding real estate do’s and don’ts and seeking advice from as many experts as possible before committing to anything.
- They like to conduct as much due diligence as possible and look for the ‘ultimate’ investment property.
So which is better?
If property investment was like many other things in life, then the more effort and energy you sink into property investing, the greater your rewards are likely to be.
In other words, the passive investor would enjoy smaller gains than the active investor, while the analytical investor would come out on top as they were willing to do the hard yards.
Yet, in relation to property investing this is only partially true!
Many passive investors purchase their investment properties the way they would buy their home – emotionally.
They tend to buy their investments near where they live, or near to where they work or close to where they want to retire or holiday – all emotional reasons.
Some live to regret their investment decisions and have difficulty holding on to their investments.
The active investor usually does well if he seeks advice from a team of consultants.
What about the analytical investor?
Let me share a story with you…
I remember years ago when I was still presenting at Property Expos (they seem to be a thing of the past now) and I ran into Leonard – a successful IT Engineer.
He has subscribed to my newsletter for over 5 years and when I first met him about 3 years earlier he said he was going to invest in property.
When I asked him how his investments were going, he explained that he had still not made a move.
Instead, he continued to research the market.
Leonard was very intelligent and has a tendency to over-analyse things, hence he is still waiting for the perfect property, the perfect time or the perfect set of circumstances in which to buy.
What he doesn’t realise is that this will never happen.
On the other hand, let’s look at an example of a passive investor…
Let’s call him Mark – who was so naïve that he bought the first property that he could get his hands on twenty years ago for $200,000.
At the time, his friends and family told Mark he was “crazy.”
He paid way too much for the house, it was a bad time to buy and it was a foolish thing to do.
Although he may not have done all of his homework, Mark still bought in a popular inner Melbourne suburb and guess what?
The value of that home is now in the order of $800,000, and if he was half as smart, Mark would have borrowed against its increasing equity to allow him to buy more properties.
The lesson from all this is...It really doesn’t matter too much if you’re a passive, active or analytical investor.
As long as you are taking action and are in the market.
It doesn’t really matter if you’re not into running around examining every aspect of the property market.
Or maybe you are and that’s not such a bad thing – as long as you don’t get so absorbed by the process of learning about property that you forget to actually use that knowledge and buy something!
In other words, if you have been thinking about investing in property, now may be the right time for you to act! It’s the best counter-cyclical opportunity in a decade. You may not have another opportunity like this for another decade or two.
But you can’t just buy any property as Mark did.
To ensure I buy a property that will outperform the market averages I use a 6 Stranded Strategic Approach.
- I would buy a property that would appeal to owner-occupiers. Not that I plan to sell my property, but because owner-occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the years ahead when the percentage of investors in the market is likely to diminish
- I would buy a property below its intrinsic value – that’s why I avoid new and off the plan properties which come at a premium price.
- In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. This will be an area where more owner-occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes. In general, these are the more affluent inner and middle-ring suburbs of our big capital cities
- I buy properties with a high Land to Asset ratio – this doesn’t necessarily mean a lot of land – just that the land is valuable
- I would look for a property with a twist – something unique, or special, different or scarce about the property, and finally
- I would buy a property where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
By following my 6 Stranded Strategic Approach, I minimise my risks and maximise my upside.
Each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour.
If one strand lets me down, I have two or three others supporting my property’s performance.
And I definitely do not look for the next speculative “hot spot” – I’m an investor not a speculator.
But I do look for suburbs going through gentrification (improving in value as young people and developers move in and replace the old houses with refurbished homes or new developments.)
So…what type of investor are you?
What if my tenant doesn’t pay their rent?
When a tenant doesn’t pay their rent on time, having a management process in place that starts before you reach the point of evicting them for not paying rent is very important.
Within 3 days of late missed rent payment, a property manager should be following up.
Within 5 days, it’s important to be on the phone advising your landlords.
10 days past the due date is indicative of a serious problem, but you still can’t take formal action yet.
You can’t file a notice giving the tenant 14 days to pay or leave until they are 14 days behind in the rent.
However, staying on top of the dates and filing the appropriate paperwork on time is important, because your landlord’s insurance may not pay for losses for days when you could have filed but didn’t.
If a good tenant is experiencing an unusual or one-time dilemma, you may be able to work with them to get the problem resolved without going to eviction. But it’s still key to find out what’s going on early and have a process in place for communicating with that tenant. Having a property manager who has a relationship with the tenants can help.
Links and Resources:
Get more details about Michael Yardney’s Property Renovations and Development workshop
Some of our favourite quotes from the show:
“In my mind, it’s the best countercyclical opportunity in at least a decade.” – Michael Yardney
“You can either buy right, or you can buy well.” – Michael Yardney
“I never buy new, I wouldn’t buy off-the-plan because they come at a premium price.” – Michael Yardney
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