Moving past your first investment property is one of the most difficult challenges for any budding investor. We asked our trusted experts for their advice on how to get past this hurdle.
Let’s face it. Growing your property portfolio is not an easy feat. There are a number of hoops you must jump through, and you need to have nerves of steel to deal with unexpected issues arising from your investments. Yet there are many ordinary investors who are creating extraordinary wealth through property. So why are so many investors getting stuck with just one property?
Why the vast majority get stuck at #1
There’s nothing like a failed first attempt to put you off investing altogether, says Ben Kingsley, director and coach at Empower Wealth. “It’s human nature that when things go well you want more of it. Yet when things don’t go as you had hoped they would, or as you were told they would by the smooth marketing agent you bought the property off, then you don’t make that mistake again,” he explains.
Overwhelming fear of something going wrong
Fear is a potent force that cripples a lot of people into inaction, especially when it comes to investing. “People get held back for fear of losing money, fear of buying in the wrong location, fear of not finding good tenants, fear of tenants destroying their property,” says Helen Collier-Kogtevs, director at Real Wealth. “What often happens with first-time investors is that they experience one or two of these scenarios and it confirms their fears for them. Their tenant falls behind in paying the rent and they start fretting. ‘What are we going to do?’ they complain. ‘We have to pay the mortgage and we’ve no rent coming in. I knew this would happen. Why did we invest in the first place?!’”
Lack of planning
Another common reason why people fail to grow their portfolios is that they just fall into investing and haven’t really planned to become investors, according to Michelle Coleman, managing director at W Financial.
“They haven’t made a conscious decision to take control over their financial freedom. For example, they have bought a bigger house for a growing family or new relationship and have decided to keep their existing property. So the desire to go beyond one or two properties isn’t there. It just happened out of convenience,” she says.
Inability to get a loan
Corr Piccone from Blue Horizons Property Consultants believes one of the main reasons that investors get stuck with one or two properties is that they run out of equity or hit their serviceability limit.
“When you are buying your first or second property, it is very important to keep these issues in mind,” he says. “Ideally, you want to find a property that is both positively geared and has capital gain potential within 12 to 24 months. This is possible with established properties, although you have to be in the right place at the right time.”
Buying negatively geared property
Buying properties that require you to put up your cash to hold them will severely limit your ability to grow your portfolio.
“If you’re committed to contributing additional funds into the mortgage every month out of your earned income, then you will have less money to live on, less borrowing capacity to invest further,” explains Brendan Kelly, director and coach at Results
“Without sufficient reliable income to sustain servicing significant debt, the bank is unlikely to lend you money. This is equivalent to hitting a financial brick wall or ceiling and is what stops investors dead in their tracks for purchasing more properties.
“Once you are in this position, it is difficult to escape from without making some significant decisions. In this circumstance you are bound by decisions already made: you have purchased in your own name, your earned income is what it is, your rent is what it is, the values of your properties are what they are. Not a lot you can do.”
Practical steps to help you expand beyond Property #1
1. If you’re just starting out, make sure you start right
Making the right choice when buying your first investment property will help you avoid the above mistakes and make buying your second and third investments possible sooner, says Sam Saggers, CEO of Positive Real Estate. “Remember your first property’s performance is key to unlocking more opportunity later. If you buy the right property in the right area and it increases in value in 24 months, you’ll have another deposit and will be able to get right back in the market again. If your investment cannot get your capital (deposit) returned within two years, you will get stuck and it could be a decade before you buy again,” cautions Saggers.
Before you get started, he urges you to ask yourself some tough questions. “It’s essential to heavily research a number of areas before deciding where to invest,” says Saggers. “Your first property is what will propel your portfolio forward, helping you to reach the magic number of properties you need. If the experience was horrible, you may never want to buy again.
“For instance, if you bought in an oversupplied area, you will find it difficult to secure a tenant. This will strain your cash flow as your property will be vacant and you will have to front the costs yourself. When a tenant does finally come along, you will be more willing to negotiate rent to have the financial burden lifted, meaning less income than you originally expected. Your capital growth will also be a lot slower in an oversupplied market, so your ‘reward’ for your
purchase will be delayed.”
2 Understand your financial situation and goals
Coleman points out that even before you start looking for your first investment property, you need to understand that you are limited by your financial capacity and therefore you should use this as a guide to map out your plan.
For example, she explains that it would be unrealistic for someone earning $35k, and who has lots of personal debt, to be able to build a $1m portfolio or create a passive income of $100k net unless they make radical changes to their finances. “I knew I had to earn more to achieve my goals, so I went and did it,” says Coleman. “You need to understand where you are at now financially and work backwards to see what changes you need to make to get to a desired financial situation in order to start investing.
“With clients, I look at what they would like to achieve, their risk profile for investing, and perhaps sometimes state the obvious in relation to some personal circumstances to enable them to move forward. It’s not a matter of saying, ‘No, you can’t do this’, but rather, ‘What do you need to do or change to achieve this?’”
Coleman lists a few helpful tips to help you move past Property 1:
- Know your numbers and do a budget based on worst-case figures.
- Don’t overextend yourself; and keep buffers in place.
- Have a plan. Even a simple target makes the journey easier (for example to purchase three properties in three years).
- Be comfortable with good debt and realise it’s your friend when used wisely.
- Surround yourself with like-minded, positive people.
- Get a second or even third opinion if required with valuations. Speak |to your broker about doing these up front, though, and not lodging an application, as this will affect your credit rating.
3. Learn as much as you can about property investing
If you want to become a truly successful property investor, Collier-Kogtevs says you need to learn everything you can about every aspect of the industry. “Study every aspect of property investing, from drivers of property price growth, to knowing how and where to do your due diligence, to being tuned into economic trends and property cycles. You need to immerse yourself in real estate until you understand every aspect of the game,” she says.
4. Have a clear idea how you’re going to make money
Investing is about making money, and therefore you should treat it as a business. Before rushing in and buying up real estate, Saggers advises that you first need to learn how to buy and sell profitably. “Making profit from real estate is not just about buying or selling. Building a portfolio requires planning your fourth and fifth purchase while still on your first.”
Therefore, when buying to make a profit, Saggers says you need to treat real estate like a business and ask the tough questions, such as:
- When will I make money from the property?
- How will I fund the next property?
- Where is the next deposit coming from and how much will I need?
- Is the property I’m purchasing now going to help me with my next purchase, or will it set me back?
5. Prepare a written detailed investment plan
If you want to be successful at property investing, then make sure you have a written business plan before you even get started. And this should include a financial plan, according to Kingsley. “You need this to have a clear idea on how are you going to manage your household budget to ensure you have the available cash to get the loan required to secure that new property,” he says.
Your financial plan should also include your overall financial goals, as well as your personal goals, to make sure your property investments will deliver those. More importantly, your plan should be in black and white, says Kingsley. “A written plan is proven to be a very powerful motivator, rather than just some cheap talk about what you plan to do one day.
A hard-copy version brings these dreams and goals to life, and can be a great reminder to help maintain your focus and move forward with your property investment strategy
,” he says.
Having an investment plan ensures you will be able to factor in the impact of unforeseen scenarios you may experience as a landlord. “What successful investors do differently is that they plan to manage these types of situations in advance, so they won’t be vulnerable and caught off guard if and when the situation occurs,” adds Collier-Kogtevs.
6. Decide on your strategy
Planning and understanding the different property investment strategies
will help you design our path and move past Property 1 relatively smoothly, according to Coleman. “There are plenty of ways to make money in property, but not everyone can do every strategy, or even the one that interests them. Often it works well when there is a balance between different strategies.
“A balanced strategy enables you to move to the next property purchase more easily, as there is less financial strain,” says Coleman. If you purchase negatively geared properties, Kelly explains that you will risk running out of borrowing capacity, given that the rent won’t meet the mortgage repayments. On the bright side, over a period of time, assuming some growth, you will be able to draw down on the equity you may have accumulated and use that for deposits.
On the other hand, if you have purchased positive cash flow properties, then while the capacity to continue to borrow money improves, the possibility for drawing down on equity generally diminishes. The risk here is running out of deposits. “To my thinking, the most effective way to keep moving forward is to release equity and borrowing capacity through selling at the right time and for the best possible price in order to keep going, ramp up and improve your portfolio,” says Kelly.
7. Reassess your situation
If you’re stuck with one underperforming property and unable to move forward, it can be difficult to escape this situation without making some significant decisions. “If you’ve purchased a property that has tied you up financially, meaning you are unable to borrow more, or you do not have the equity or cash to get a second, then something needs to change,” explains Kelly.
“You could wait and hope that the market moves in your favour so you can build equity, and that you get that long-awaited promotion so you can borrow more. Under these circumstances you may be able to go again – but this is all ‘hope and pray’. “You could increase the rent or rent it out by the room instead so that the income improves… but even then it may not be enough.”
8. Sell and start again
If you want to get it right and be able to move forward, Kelly says you may need to sell and start all over again. “It may be better to do all that you can to improve the property and present it really well for sale. Sell it, release the equity, free up the borrowing capacity, learn from the error in judgment, and buy the next property in such a way as to not get hamstrung again,” he advises.
“This time around you now have the wisdom of what not to do. You’d seek the right advice to structure yourself appropriately and then begin to learn all about different investing strategies that will allow you to invest sustainably. “With the combined knowledge of how to structure yourself and take this on sustainably,” Kelly explains, “your equity position would continue to grow and the financial rewards you are after would be there for the taking.”
Coleman adds that she’s often seen clients who have been held back by a property that didn’t fit their lifestyle and strategy, and she also favours cutting it loose in order to move forward. “I am by nature a buy and hold investor, but in certain circumstances you need to consider selling a property.”
For example, she says that in cases where you have lots of equity in a property but the rental return and current loan mean that you can’t service anything else, you may consider selling it to access that large amount of equity and create space for a new investment from which you can get a better return. “You could also do a renovation or split a rear block and create some equity, but if you stubbornly hold on to your property without doing anything, that property could be doing you more damage than good,”
Can you afford to buy in this suburb? Find out how much you can borrow