Six important rules of property investment

Anyone who has been in the property investment sector for a while knows all too well that it takes a long time to understand its golden rules.

If only we all understood them when we were in our 20s, instead of many years later.

Of course, these days, there are a plethora of books, blogs and educational courses which you can use to improve your property knowledge.

But why not start with these 6 rules of property investment I’ve learned over the years.

1.    Keep a level head

Property doesn’t always go up in price – in fact that’s one of most often touted fallacies.

So be prepared for flat patches in the property cycle and times when the value of your property may slip back a  little.

Protect yourself by having a financial buffer to see you through the tough times to make sure you’re not forced to sell in a downturn.

2.    Pay the right price

This sounds simple but often it’s not given enough consideration.

The theory behind this is that you make your money in property investment by buying the right property and paying the right price.

Yet many investors overpay by purchasing emotionally, while others give away the first few years’ capital growth by paying a premium to a property developer.

The lesson is to thoroughly research the market and understand the intrinsic value of the property you’re considering buying.

3.    Adding value

One of my golden rules of property investment is to force appreciation of the value of my properties by “manufacturing” capital growth through renovations.

I’ve found that by steering clear of structural renovations and instead undertaking appropriate cosmetic renovations I can often produce a profit of double the cost of the renovation in a very short space of time.

4.    Not following the crowd

Let's face it, real estate is a newsworthy topic because it affects everyone in the community.

You're either a tenant or a homeowner - everyone needs somewhere to live.

With this in mind, there’s always a plethora of property stories in the press, which can lurch from boom to bust in the very same edition!

The more column centimetres devoted to real estate, and especially on the front page, the hotter the property market in that area.

Be wary of believing much of what you read.

Do your own research and become an expert instead of following the crowd – potentially off a cliff!

5.    Following a leader

Now while I've just said that you shouldn't follow the crowd, you should follow a trusted leader or expert.

This is especially true if they're someone who you trust and they have a proven track record to back up their advice.

For example in 2008 Warren Buffett wrote an article titled ‘Buy American, I Am’, if you followed his lead your stock portfolio would've increased by 212 per cent! 

Find the property people whose advice you trust and whose real estate success is testament to their philosophy.

But always do your own research and due diligence as well.

6. Run the numbers

Of course, you should have a good understanding of the financial impact of any property transaction before you enter into it.

Do you know how stamp duty is treated in tax terms on your investment property?

How does claiming depreciation affect my capital gains tax when you sell it?

When you sell the property – how are the selling fees treated for CGT purposes?

These are tricky questions but you should know the answers before buying an investment property.

These are just six of the many rules of property I’ve learned in my years as an investor.