Everyone who ventures into property investment is looking for a foolproof recipe for success – so allow me to extend the cooking metaphor.
Let’s use the analogy of MasterChef. These talented amateurs get an extensive recipe to cook something amazing. And while they're following the recipe, everything's on track and they're doing well. Then a curve ball gets thrown in, things go a little bit haywire and that's where it starts to fall apart.
When investing in property, once you have the recipe in terms of what works, don't try to get too creative with it. Just follow the process – and treat it like a business.
Successful investing is about being dull and boring yet super-effective. I tell clients, I don't care if you love the property. The property is purely the vehicle that grows in value and ideally doesn't cost you anything out of your pocket to hold it.
Supposing I offered you a financial product that will grow by half a million dollars in the next 10 years and won’t cost you anything (other than ‘lending’ the capital) to get that.
Would you buy it based on that financial decision? Absolutely. So why does the fence or the brickwork or the design or any of that make any difference?
Try to apply ‘the pub test’ – in other words, bring your planned investment back to the absolute basics and see if it stands up to scrutiny.
The benefit of where property is superior to other investments is the leverage, because a bank will let us borrow more of the purchase price than for shares, for example. The bigger the lever, the better the return.
You need to be comfortable with debt. And most Australians aren't comfortable with debt, because that's how we're brought up. The biggest single debt for most people is on their own home – and that is a real burden because every cent of that debt is serviced from your own money, post-tax.
With investments, however, the rental income comes in, the tax benefits accrue and those income sources can cover the bulk of the holding costs, especially in today’s low interest rate environment.
We have a saying here at OpenCorp: growth is free. The downside is that it doesn't happen by 10 o'clock tomorrow morning. It takes time. But if we apply our businesslike mind to investment, we can adopt a few golden rules.
1. Broaden your horizons
It's very, very rare that where you live is the ideal location for an investment. It makes little sense to have all your eggs in one basket i.e. your home and investment property in the same suburb. That's a fairly big punt that your suburb is going to outperform the market.
At OpenCorp, we start by looking at which of the capital city markets makes sense at any point in time. Supply and demand drives price growth – in anything – and capital cities have the least amount of available land and the most amount of people. We also want to shield ourselves from market shocks and transient changes in population in places such as mining towns.
So, we look at the volume of supply coming through based on development approvals, and on the demand side, what the population growth forecast is and how the government is planning for that.
That allows us to narrow our focus on the four major capital cities (Sydney, Melbourne, Brisbane and Perth) and which ones make the most sense at that point in time. Within that, we then drill down to the local areas – whether the government is investing in employment hubs in suburban areas.
2. Look into the crystal ball
To be able to hold a handful of properties in our portfolio and not lose sleep at night, we need consistent rental income – the biggest area of concern for new investors.
Look closely at what future infrastructure is planned, what are the current amenities and, very specifically, what is the owner-occupied percentage.
Areas with abundant owner-occupiers have a smaller available supply of rentals, therefore high demand – so if tenants leave, there's always an underlying demand for rental property.
3. Fit for purpose
Once we've got the market and the area worked out, the third process is the specific property itself. What is the demographic of the area – families, couples? How many bedrooms and other features suit that demographic?
There are factors that determine the rental income, and others that don't. If the bathroom is dripping with gold taps, that increases your purchase price, but won’t bring in more rent.
Where we can add value is by delivering an optimum size and quality home, where your floorplan finds the perfect balance between tenant appeal, cost effectiveness and rental income, all of which results in a lower holding cost to you, the investor.
Cost-effectiveness works out in the long run.
Let's say a property leaves you $50 a week out of pocket, but through our process you get that down to $25 a week. You can then hold two properties for the same net sum, which over 10 to 15 years could make hundreds of thousands of dollars’ difference just by putting the emphasis on those one percenters.
Michael Beresford is an experienced property investment advisor and Director of Investment Services at OpenCorp, Australia’s leading property investment specialists. His track record includes helping 1000+ OpenCorp clients add close to $600m in value to their portfolios.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.