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By Michael Yardney
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Property investment 101

If you're looking to get into property or move up to the next rung of the property ladder, here are some words of advice.

Property investment is simple, but not easy, and that’s not a play on words.

Investment Property

It’s not something you should enter into lightly, but for some reason, that’s what a lot of people who have dreams of making millions with real estate do.

They think, "I can go out, buy a house somewhere, stick in some tenants to pay the mortgage and make a killing! How hard can it be?"

The fact is most property investors fail.

Statistics show that around 50 per cent of people who buy an investment property sell up in the first five years, and of those who stay in the game, 90 per cent never get past owning one or two properties.

So if you're looking to get into property or move up to the next rung of the property ladder, here are some words of advice.

1. Knowledge is property investment power

Firstly, you need to understand what makes an “investment grade” property and recognise that not just any old digs will do.

You can profit from real estate in one of four ways, and if you get the combination right you’ll make money from bricks and mortar.

They are;

  • Capital Growth – to build yourself a sound asset base your properties will need to appreciate in value at wealth-building rates (in other words above average capital growth.) This will come from strong demand from owner-occupiers (who push up property values) and tenants (who help you pay your mortgage.)
  • Cash Flow –in other words your rent.
  • Tax benefits –while you should never invest solely for this reason; a good tax strategy can help you manage your cash flow, decrease your tax obligations and increase your bottom line.
  • Accelerated Growth –getting your hands a little dirty (metaphorically speaking) by investing in a property that needs a bit of cosmetic TLC through renovations or a major facelift through property development, is a great way to manufacture capital growth.

2. Understand the market moves in cycles

While timing the market is not the be-all and end-all, it certainly helps to understand how the property market moves in cycles.

Following the herd and buying when everyone else is on the property bandwagon doesn’t always work.

That’s often when the market is near its peak.

On the other hand, you have more chance of nabbing a good deal in a buyer’s market, when property is out of favour.

That’s why Warren Buffet said, “Be fearful when others are greedy and be greedy when others are fearful."

Having said that, over the years I’ve changed my view on timing the market, especially if you’re an established investor.

If you’re into real estate for the long haul (and that’s really the only way to play the property game) then time in the market (owning a property that will outperform the averages in the long term) will trump timing the market (making a one-off capital gain, but then often missing out on strong, long term growth because you’ve bought in the wrong location.)

3. The right location does the heavy lifting

Location does most of the heavy lifting for your property investment success.

Around eighty per cent of your property’s performance will be due to buying in the right location and the balance by owing the right property, an “investment grade” property that suits the fundamental demographic in that location.

So I look for a location that has a long history of strong capital growth and one that will continue to outperform the averages because of the demographics in the area.

This will be a location 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.

Location

In general, these are the more affluent inner and middle ring suburbs of our big capital cities.

Within that suburb, I look for proximity to amenities like public transport, shops, schools and lifestyle amenities.

I also like buying in areas going through gentrification.

Gentrification is a change in the fortunes of a suburb as it is discovered by a higher-income demographic, which slowly pushes out the lower-income residents.

In general, capital growth in these areas will outperform the averages.

These areas go from ugly ducklings to beautiful swans and therefore the homes in these suburbs increase in capital value faster than the average.

As a property investor, if you can identify an area at the earlier stages of gentrification and buy while prices are more affordable – you stand to benefit from ongoing capital growth.

One way to find this type of location is to drive through the streets and look for some of the obvious indicators that people with money are moving in:

  • Are people spending large amounts of money on renovating/extending their homes?
    • Are there small black (or maybe now it's white - the new black) BMWs and Audis parked in the driveways or are they old Ford Falcons and Holden utes?
    • Is the nature of the shops changing – more cafés and deli and lifestyle shops.

4. Money, money, money

Property investing is really a game of finance so, when it comes to real estate, a sound financial strategy is just as important as a sound property strategy.

Without a well-rounded understanding of how to maximise your borrowing power, use equity as leverage to build your portfolio and maintain a financial buffer to see you through the difficult times that we all ultimately face, you’re setting yourself up to fail financially.

5. Develop financial fluency

While it’s relatively easy to make lots of money through property investment, many people still manage to lose it all.

If you are financially illiterate when it comes to managing money, budgeting or balancing the books at home, how do you think you’ll go when it comes to managing a multi-million dollar property portfolio?

You may need to be money smart and learn the ins and outs of budgeting, taxation and the financial advantages you can enjoy as an investor, as well as the best structures to own your investments in.

Finance Pre Approved

Rather than trying to learn it all yourself and wear numerous hats, it's worth surrounding yourself with a good team of professionals who can guide you with their knowledge and expertise.

An independent property strategist, a finance broker and an accountant should all be people you rely on to support you in the journey to real estate riches.

If you’re the smartest person on your team, you’re in trouble!

Some final words of advice (or warning) for investors

Property investment is a process, not an event, and the property you eventually buy should be the physical manifestation of a whole lot of decisions that will be made in the right order.

However, that's not how most people buy their investments, is it?

Financial Advice

They buy a property close to where they live, close to where they want to retire or close to where they holiday.

At Metropole we believe it should all start by building a Strategic Property Plan because attaining wealth doesn’t just happen, it’s the result of a well-executed plan.

You see..planning is bringing the future into the present so you can do something about it now!

Your Strategic Property Plan should contain the following components:

  1. An asset accumulation strategy
  2. A manufacturing capital growth strategy
  3. A rental growth strategy
  4. An asset protection and tax minimisation strategy
  5. A finance strategy including long-term debt reduction and…
  6. A living off your property portfolio strategy

When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because it will 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, so click here now and find out more about how at Metropole we could build you a personalised plan

Some further thoughts:

  1. Be cautious– You’ll find everyone is happy to give you advice. Rather than listening to well-meaning friends, it’s important to only listen to people who have achieved the financial independence you’re looking for and who’ve maintained it through a number of property cycles.
  2. Understand the difference between a salesperson and an advisor. Many salespeople are cloaked as advisors and while they suggest they’re representing you, in fact, they are representing the seller or a property developer. Only take advice from someone who is independent and unbiased rather than someone who is trying to sell you something.
  3. Be prepared to pay for advice – I’ve found that good advice is never expensive. In fact, it’s much cheaper than learning from your mistakes.
  4. Not everything that glitters is goldoften when you start out it can be tempting to see opportunities everywhere. The problem is you don’t yet have the perspective to decide what is a good investment and what is not.

Property doesn’t discriminate; it doesn’t care who owns it.

The residential property market is worth almost $10trillion today and over the next decade, it will increase in value by trillions of dollars.

If you get it right, you can have your share.

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.
3 comments

Thank you Michael - great article and appreciate the timely reminders! Like the comment about the cars. Very relevant. One comment that may be open to disagreement is not looking to buy near home which can be open to conjecture if the potential ...Read full version

1 reply

This article is very informative. I am impressed after reading and getting knowledge about property investment.

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