Maximising your profits through property investing may be best achieved over the long term, but there are smart strategies you can use now to fast-track your profit and retire sooner
We have been told property investing is for the long-term. In fact experts we’ve interviewed talked about keeping your investment for as long as possible due to the high cost of buying and selling. Yet here we are telling you that you can fast-track your portfolio by tweaking your strategy without putting your finances and your sanity in danger. Yes, we have been told by our trusted experts it can be done.
Over the following pages, you’ll see different strategies from our resident experts, Ben Kingsley at Empower Wealth, Brendan Kelly at Results Mentoring and Jo Chiver from Property Bloom. They’ll show you step by step how to take your investments to the next level quickly and safely so that you, too, can enjoy the financial freedom that you’ve been dreaming about.
Ben Kingsley's plan
Strategy: Buy for growth and time it right
In order to fast track your profit, you need to understand the property cycle intimately and do a meticulous research. (Ed note: An in-depth article explaining the cycle was featured in the November issue. Email us if you want a copy of the article.) Buying a property in a good location that tracks the long term average of 8% pa, (which we call baseline execution) will only give you a standard return compared to buying for growth at the right time which, we call the timing execution model. With the timing-the-market strategy, you need to do your research diligently to be able to pick the right property and location and time it perfectly to get an uplift in value of 20% in the first year and then 8% each year after.
How do you achieve this result?
- Research relentlessly - Research is king. It’s extremely time-consuming, but the results are life changing. Spend a good deal of time understanding the market you’re interested in, what makes it tick, what would drive growth in values and rents, as well as the demand and supply situation.
- Look for opportunities in the Big Three - There is opportunity in the three biggest cities (Sydney, Melbourne and Brisbane) for this strategy to work. It is possible in Perth and Adelaide but it’s harder again because the big incomes don’t just come from the CBDs.
- Ensure you buy under median value - Buy the properties at or below median value. Although this strategy is proved to work with quality period homes, it works best in the price range where more of the market can afford, and this is usually properties priced under the median.
- Focus on buying quality property, not bargains - Don’t expect to get a bargain – the values of properties in these areas aren’t going to be bargains, and there is good reason for this – these properties are in demand. Expect to pay fair market value.
- Ensure there is high owner-occupier demand - Make sure your true competition is from owner-occupiers and not from other investors. A great indicator the you are in good location is when your main competition is coming from people who want to live in the area/property, as it a great measure of the appeal of the area.
How the numbers work look like in real life
Assuming you’ve done all your legwork in determining the right property in the right area, here’s how the two strategies compare side by side.
In order to design a workable game plan, we assumed the following:
- The first 5 years would be the accumulation years to fast track your outcome.
- Purchase price of $500,000 at 10% deposit (90%) LVR
If the purchase price is $500,000 and the costs are 5% of the purchase price, then it will cost $525,000 to complete the purchase of each property. Lending ratio is assumed at 90% which equates to a $450,000 loan. Therefore the funds to complete each property will be $75,000.
Using the baseline execution and assuming the property value grew 8% within 12 months, you get an equity gain of $40,000 during the first year.
However, if you factor in the buying cost (5%) and a deposit (5%), you won’t have enough funds to buy another $500,000 in year 2. Even at higher LVR of 95%, you still need $50,000 to buy your next property.
Timing the market execution
With the perfecting timing strategy for growth, you would be able to invest every year, thanks to the strong increase in the value and rent of the property.
Both strategies call for meticulous research. The only difference is the first year’s growth of 20%, which then allows for the equity release to occur earlier and hence the acquisition of more properties sooner.
End of year 1 assessment
Investment property #1 will return cash flow positive within 10 years and 3 months
Investment property #1 will return cash flow positive within eight years and three months.
What does this mean?
It’s clear that timing the market to achieve a strong capital growth outcome with a short period of time provides for superior investment returns. The example used above clearly shows that because the value of the property has grown, not only have you benefited from the greater net gain in equity, but you also had two further benefits:
- You can use this equity to purchase sooner
- The increased rental income, given the increased value of the property, means the property will show positive cash flow sooner
Your portfolio at 5 years
By the end of five years, you would have accumulated three properties given that each property has only achieved 8% growth p.a during the accumulation phase.
This strategy has yielded five properties – one per year – as the equity gain of $100,000 per property has allowed for the acquisition of a new property each year.
Your portfolio at 10 years
After the accumulation phase of the first five years, no additional properties are bought, demonstrating that with superior asset selection coupled with the benefit of time, your superior investment returns just keep on giving.
See the charts below and the table opposite for a comparison of the results of the strategies. The table assumes the values of the new acquisitions occurring throughout the five years are included. Timing-the-market execution assumes rental income increased by 20% in the following year after value growth of 20% has been achieved.
Top tips to executing the timing the market strategy
As you can see, timing the market can help you ramp up your profit significantly and safely over shorter period of time.
The properties best suited for this strategy ranges from quality period homes to standard and tired units.
- Study the area/location and then drill down to the properties that are in demand in this area.
- Eliminate the areas with ample existing supply of property, as well as the areas with new stock to come online in the short terms, i.e. new subdivisions or new medium- or high-density approved developments on-mass as this will increase supply and stagnate values.
- On the demand side, study the auction clearance rates closely, down to the property type and number of bedroonms, as this drills you down to where real demand lives in real time results. For example, you might have a suburb that has 15,000 dwellings – so the median value is really only going to be a guide, but what if 2-bedroom apartment in that area have a clearance rate of over 80% Then you know for a fact that there is extremely strong demand, and limited supply, so you are going to see a quick uplift in values, and that is what timing the market is all about.
- Track each property type by number of bedrooms, and watch their trend patterns.
- Combine this with lifestyle and demographic/socio-demographic research around incomes and age ranges and changes between census periods, and you will be well placed to find areas in city locations that have the real uplift in values (20%) in a year, and that will also sustain the longer-term trend of growth as they become ‘blue chip’ locations.
Make no mistake, this strategy looks amazing on paper and it’s the pursuit of every investor to get the best returns they can. What’s interesting about this strategy compared to most of the other strategies talked about when referencing ‘fast and safe’ is that almost all of them require active or ‘hands-on’ work – really a second job to make it happen quickly.
This strategy however is all about the skill of the investor and the analysis they undertake to seek out the right opportunities and the right time.
Interestingly, it also highlights that it can be done successfully by focusing on growth-property areas, which in many cases can be city locations or major town locations; and this is also often reduces the downside risk to the investor as the growth drivers in a city location are more reliable and less volatile then speculative locations like mining centres.
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