What do beginning property investors need to know?
That’s what I was recently asked in an interview for JetStar Airlines inflight magazine.
Here’s the article they wrote called:
‘Getting your financial ducks in a row is key to successful property investment’
Investing in property is a popular path to building wealth but you need to know what you’re doing, especially when it comes to financial risk.
We asked author and property investment expert Michael Yardney for his golden rules.
What kind of financial savvy do you need before investing in property?
One of the reasons many property investors fail is because they don’t get a basic financial education and specific property investment knowledge prior to investing.
Many people think that because they live in a house or apartment they know about real estate, but that’s not really the case because the statistics show that most property investors fail.
50 per cent of those who buy an investment property sell up within the first five years and those who remain in the game, 92 per cent never get past their second investment property – in other words they never develop the financial freedom they aspire to.
The good news is that there’s lots of financial and investment advice available on the Internet to help beginning investors.
The bad news is that there’s lots of financial and investment advice available on the Internet to help beginning investors – there is so much misinformation and self-serving information that it is sometimes hard to know who to listen to.
If you’re looking for professional advice, who should you ask?
It’s important to get unbiased and independent advice before making any financial decisions and particularly so with real estate investing.
All the wealthy people I know have advisors and pay for them (they see this as an investment not an expense) while other people tend to get free “advice” from salespeople.
I believe is it important that property investors have an independent property strategist on their side to level the playing field.
They also need a finance broker to help them organise a loan to suit their needs and an accountant to advise them regarding ownership structures for their property.
What are the best kinds of loans for property investment – variable, fixed, interest only?
In general, property investors take interest-only loans rather than paying off principal – this makes the loan repayments lower and allows their spare cash to be reinvested in another property.
In today’s low interest rate environment many investors are wondering whether it makes sense to fix part or all of their loans and, as everyone’s circumstances are different, there is no one right answer.
However, it often makes sense to fix a portion of your loans and leave some variable to give flexibility.
Even if you only have one investment property and one loan, you can still fix a portion of this loan.
Do you need insurance? What kind?
One of the great things about residential real estate as a form of investment is that you can insure for many of the risks.
I believe property investors should take out the following:
- Life insurance – to protect the family so they can payout the mortgage leaving family members with the investment but no debt;
- Income protection insurance - to make sure that you can still make your repayments if you lose your job;
- Building insurance – for the unexpected!
- Landlord’s insurance
Should you negative gear your investment?
The underlying fundamental of taking a short-term loss with negative gearing is that your investment property will increase in value over time considerably more than the negative cash flow shortfall.
I don’t believe that one should invest for tax reasons, it’s more important to invest for asset growth and any tax benefits from negative gearing or depreciation are seen as icing on the cake.