Your Step-By-Step Guide to Investing In 2017

By
31/8/2017
If you want to be successful as a property investor, it’s important to do things in the right order. Michael Yardney, our Reader’s Choice Property Investment Advisor of the Year 2016, offers this advice to help you move forward with your property-buying journey in 2017.

Unfortunately many investors fail because they choose a property first – usually an emotional choice rather than a considered decision – and then do some research around the property and location to help confirm the decision they’ve already made. There’s a name for this – it’s known as confirmation bias.

However, strategic investors do things differently.

Sometimes it takes up to a year for them to select an ‘investment grade’ property, as they recognise that real estate is not a get-rich-quick scheme.

Step 1: Develop a plan
If you’re going to emulate these successful investors, the first few months of your 12-month plan to get into property should be spent on educating yourself. Now this will come at a cost – good advice doesn’t come for free, but in my opinion professional advice is an investment, not an expense.

You see, I’ve found it takes the average investor around 30 years to become financially independent. Often, the first 10 years of their property journey is spent finding out what not to do, while they follow a few flawed investment strategies.

The next five years are often spent unravelling the mistakes of the first leg of their journey and selling off underperforming properties. Then it takes at least a couple of good property cycles to build a substantial asset base.

However, those wasted early years can easily be avoided by adequately educating yourself and surrounding yourself with good mentors and an independent team of advisors.

So, in the first months of a 12-month investment plan, you must develop an understanding of where you are now (financially speaking), what you want to achieve, your time frames, and why you’re hoping to invest – what you’re planning to achieve.

Of course there are no right or wrong answers when developing your plan, because every investor’s motivations and end goals will be different, but you must understand what property can do for you and what it can’t.

At this stage of your planning, you must be careful not to rush in. The first investor past the point is rarely the victor, in my opinion.

What I’m suggesting is that you spend these early months learning and educating yourself rather than rushing out and buying a property straight away – especially if ‘FOMO’ (or fear of missing out), is your main motivator.

Step 2: Choose a strategy
The next step is to choose a property strategy to help you reach your investment goals.

In my experience, the best strategies are the ones that are known, proven and trusted and have worked through multiple property cycles.

A classic novice investor mistake is investing for cash flow properties rather than buying properties for long-term capital growth. In my opinion it’s important to understand that while cash flow is critical – it keeps you in the property game – it’s really capital growth, which is the increased equity in your property portfolio, that gets you out of the rat race.

Step 3: Gather your property team
During those first few months when you’re learning to better understand the market, it’s also time to gather your property team.

This must be a team of professionals who can offer you sound independent investment advice. And, like in all industries, the property investment sector has good operators and questionable ones, so be careful who you listen to as not everyone has your best interests at heart.

It’s imperative that they are independent and unbiased because unfortunately there are many so-called ‘advisors’ out there who are actually salespersons and marketers, trying to sell you whatever shoddy property they have on their stock list rather than a property that suits your requirements.

Your property team should include:
• an independent property strategist who can project manage your investment journey as well as the other consultants
• a finance broker to help you through the maze of lenders
• a financial planner who can discuss with you concepts such as self-managed superannuation funds and insurance
• a solicitor to handle the legal aspects of your transaction
• a property-savvy accountant

One of the questions you should ask your accountant is: in what name should you be buying your property – in your own name, in joint names, in a family trust, or maybe in a self-managed superannuation fund? And you need to decide this before you apply for finance, as the loan must be in the name of the correct entity.
 
BANKS WANT TO KNOW!
How steady is your employment?
How stable are your living arrangements?
What type of loans have you sought and been approved for in the past?
How long did it take you to repay your debts?
Did you default or miss payments on any loans?
Are there any judgments against you with regard to bad debts?
Did you make timely repayments or did you drag your feet?
How many credit enquiries have you made and over what time frame?

Step 4: Deal with money matters
We’ve all heard that APRA’s restrictions have caused the banks to tighten the screws and make it even harder for many investors to get a loan, so in the early days of your 12-month program you’ll also need to get your financial house in order to make yourself more attractive to lenders.

A great place to start is to check your credit score online as this ranking is used by the banks and lenders to determine whether you can borrow, how much you can borrow, and at what rates.

It’s also important to understand the other attributes that lenders assess when you apply for a loan (see boxout for banks want to know).

By answering questions such as these before you apply for a home loan you will gain a better understanding of your current financial position – money warts and all!

Step 5: Select a property
As you can see, the first few months of any new investment plan should be focused on understanding the reality of your financial situation, gathering your property team and consulting a finance broker.

So, whether this takes one month or six, it’s only once these steps are complete – and after obtaining a loan pre-approval so that you understand your budget – that you should begin your property search.

Now it’s time to decide where you’re going to buy your property.

As around 80% of your property’s performance will be determined by its location, and possibly only 20% by the specific property you buy in that location, researching the correct location is critical.

This is all about looking at demographics and wages growth. Look for a location that is gentrifying or find an area where economic growth will create jobs and wages growth so that the disposable incomes of the locals are growing strongly and making housing more affordable.

Then, to ensure investors buy a property that outperforms the market averages, I suggest they consider using my 6-Stranded Strategic Approach, which means they should only buy a property that fits the following criteria:

1. The property will appeal to owner-occupiers. Not that the investor is planning to sell it, but because owner-occupiers will buy similar properties, pushing up local real estate values. This will be particularly important in the future as the percentage of investors in the market is likely to diminish.

2. It is below intrinsic value – that’s why I’d avoid new and off-the-plan properties which come at a premium price.

3. There is a high land-to-asset ratio. That doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.

4. It is in an area with a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area, as mentioned above.

5. It offers a twist – something unique, or special, different or scarce about the property.

6. It offers the opportunity to manufacture capital growth through refurbishment, renovations or redevelopment, rather than waiting for the market to do the heavy lifting as we’re heading into a period of lower capital growth.
 

"Around 80% of your property’s performance will be determined by its location ... [so] researching the correct location is critical" 


In the last few months of this 12-month journey, the strategic investor would prepare for settlement of their property by:
• finalising their loan documentation in readiness for taking possession
• organising insurance of their property, including building contents and landlord insurance
• ensuring their personal insurance is adequate – for example having sufficient life and income protection insurance to cover the unexpected
• finding a professional property manager to manage their asset

Now you can see why strategic investors don’t just rush out and buy any old property. They realise that wealth is the transfer of money from the impatient to the patient.

Michael Yardney
is the director of 
Metropole Property Strategists



 

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