Around a year ago I started a podcast for our property investor clients with the aim of assisting them to get the most out of their investing.
We look after their depreciation schedules, but I wanted to put them in touch with experts to assist them with investing overall.
The statistics show us that more than two thirds of property investors only ever purchase one investment property.
This tells me that investors may not be getting that first investment right, and that a lot of people are not going to reach retirement with the income that they’d like.
After interviewing some of the brightest property and investment minds in Australia, I thought I’d share five common threads that are key ingredients for successful property investment.
By the way...I haven't interview Michael Yardney yet, but he really should be at the top of the list of the best property minds - so I've recently invited him on to my show.
1. Spend less than you earn and invest the difference
It’s certainly the case that some things in life are elegantly simple.
This bit of advice seems too trivial to even have as a point but it’s one of the key forces stopping people from achieving their financial goals.
It was Pete Wargent from episode 1 that first introduced this concept.
His idea comes from the power of compound returns.
He himself has been taking money from his salary every month and chipping it into index funds for decades, but the idea runs even deeper than that.
This idea comes up so often in the interviews that I have a standard joke about how I’m screwing it up myself.
When I was 20 years old, it would be a bit of a treat for me to spend $12-16 for a bottle of wine.
As I got to the mid-twenties, my price range was around the $18-$22 mark.
These days around $22-$24 is about my average spend with an occasionally thirty something thrown in the mix.
It sounds silly but what’s happened here is my expectations have ratchetted up in parallel with my income.
Without really thinking about it, I’ve found myself with an extra few bucks in the pay packet and found an easy way to relieve myself of them.
Society is conspiring against us, there’s a million ways you can relieve yourself of extra money, and psychologically the harder we work and the more we earn, the more we believe we deserve these extra rewards.
Nobody is telling you how to spend any extra money, but the experts are warning us about this phenomenon.
If you want to achieve your financial goals, it’s clearly important to observe this phenomenon, and keep your expectations in check, for the greater goal of where you want to be in ten, twenty or thirty years’ time.
Investing for financial security, or retirement is a long game and the best time to start was yesterday.
Anything you can spare now will pay compounded dividends in the future.
2. Property investing is a long-term game
In Australia, the average length of time we’re holding real estate according to a 2015 CoreLogic study is 10.5 years.
In 2017 CoreLogic also provided the following gem from the September quarter of 2016:
“Homes that resold at a loss had a typical length of ownership of 6.1 years, but for those which sold at a gross profit, the typical length of ownership was recorded at 9.1 years.” - CoreLogic’s Head of Research, Cameron Kusher
Now these numbers might move around a bit, but you must ask the question why are people selling at a loss in the first place?
My guess is further outlined in point five, but what this quote does tell us is that successful investing must at least be a decade long operation.
We all know that property moves in cycles.
If you look at rolling annual percentage price increases in the combined capital cities, you’ll see peaks in 2002, 2008, 2011 and 2018.
The global financial crisis created a bit of a peak and a trough across this timeframe which added maybe an extra peak .
Either way, we could say that there’s roughly an eight-year cycle from peak to peak over the last twenty years.
Time in the market is more important than timing the market, but it is possible to do both. Consider though the likelihood of missing a second peak in the cycle if you’re selling within ten years of ownership.
Patience is difficult with investing, but it’s a key skill that investors need to master.
3. Get your due diligence right and know why you’re investing in and area
One of the things I’ve tried to educate investors on is not just buying the property around the corner.
You might think you know the area well, but what you know about it is maybe not what’s going to drive price growth.
For example, do you know the main employers and what’s happening within their industry?
Do you know the infrastructure spending in the pipeline?
What about the days on market trend or the new construction approvals?
All these aspects are key to selecting an area.
In episode 4, Simon Pressely suggests that what we tend to know about our local market are things like where the cafes are and where the best place to fill up with petrol us.
Due diligence is an extremely important thing to get right, and the statistics around the number of properties investors own suggests we’re not always nailing it.
In episode 11, Brett Warren talks about his checklist, which includes areas with a high percentage of owner occupiers, location wage growth and disposable income, proximity to public transport, walkability, school catchments and more.
There is a myriad of things you can look at, including what the suburb looks like during a downturn.
Aside from area due diligence, there’s the property itself.
James Freudigmann in episode 9 looks at things like public housing proximity, caveats and easements, nearby development applications and zoning changes.
All these points have implications for the long-term capital growth of the property.
Doing the due diligence is the most important part of selecting a property with the best chance of capital growth, and too often investors cite reasons for purchasing a property being a media article, a velvet tongued property spruiker or a mate at a barbeque.
4. The property comes last and the plan comes first
As investors, we like to think about the fun stuff, like finding the property, negotiating a price and cracking a bottle of champagne to celebrate the new addition to the portfolio.
I hate to be the fun police, but without a plan for what you’re trying to achieve, you’re likely to select the wrong property.
Luke Harris in episode 16 calls it ‘putting the cart before the horse,’ and is a big advocate in writing down a plan with a number and a date on it.
Your plan is likely to dictate whether high yielding properties are important to you, or the leverage you’re prepared to go to.
Paul Sonntag from episode 2 works heavily with financial planners to assist his clients to have a plan so he can focus on helping them find the best property that fits their unique situation and strongly advocates that the plan comes before the property.
In short, without a goal in mind, you’re likely to take more of a zig zag route from A to B and there’s no way of testing to see if you’re on track, or completely the wrong path.
With a detailed plan you’ll know the type to investments and returns you’ll need to achieve your end goal.
5. Always have a cash buffer
Check out the Governments ‘money smart’ website and you’ll see they suggest putting at least $10,000 in an emergency savings fund to give you some breathing space with life’s ups and downs.
Without breathing space, you’re likely to have to make decisions that have you deviating from your plan.
Such as taking out a personal loan or being forced to sell an investment property.
Christine Williams in episode 3 suggests having an offset account, especially if the bank offers it to you.
She says “I've heard people say you've got to have three months mortgage repayments, but it's not just the three months’ worth of mortgage repayments on the investment property, it's actually three months’ worth of your own mortgage repayments plus the investment property, plus rates and so forth. “
Let’s say you have a property that’s grown solidly over the last few years, but you’ve just lost your job, the tenant has vacated, and rates are due.
Most people wouldn’t hesitate to sell the property.
For the sake of having $20,000 to $50,000 you could avoid having to take a bad job because you need the money, having to sell a good quality asset and the stress of putting food on the table.
Consider a $500,000 investment property in NSW for example.
Add up the stamp duty, mortgage registration and transfer and you’re in the hole for just over $18,000.
Suddenly you’re down 3.7% on your investment from day one.
Add to that the time to do your due diligence, the solicitor or conveyancers cost, the real estate agent as well as the pest and building.
Getting in and out of property is expensive, more reason not to do it too often, or if you don’t need to.
This is the power of the cash buffer.