Regardless of what strategy you use, what properties you buy and where you buy them, we all share one common goal as investors: to create wealth.
While this is the ultimate end game for every property investor, it’s not always the outcome. There are many ways to lose money in real estate, and unfortunately a fair share of Australians wind up in a worse position after buying investment properties than they were in before.
So how can you avoid this fate and instead work towards creating property wealth – and even, dare we say it, become a property millionaire?
The investors we profile every month in Your Investment Property magazine
have all achieved tremendous success with their property portfolios to date, using a range of strategies to reach their goals. Some have turned to renovation and development tactics; others have constructed granny flats to boost their cash flow. Others still have relied on buying under market value to help them maximise their ‘buy and hold’ strategy for success.
While their methods for growing their real estate portfolios vary, these investors have all achieved fantastic results, demonstrating that there are many ways to grow your wealth in the property market.
If you’re keen to follow in their footsteps, here’s what you need to do.
STEP 1: TAKE STOCK OF YOUR SITUATION
The first step towards creating financial freedom for your future is to understand your financial position as it stands today. After all, you can’t get from point A to point B if you don’t even know your starting point, let alone your destination!
• Creating a clear budget that outlines your monthly income and expenditure (if you don’t already have one)
• Looking for opportunities to trim costs – such as negotiating a better car insurance deal, or cancelling your rarely used gym membership
• Minimising your obligations with a debt repayment strategy that may include consolidating credit cards, switching to no-interest deals and fast-tracking loan repayments
• Analysing your savings and your ability to grow your bank balance
• Meeting with an experienced mortgage broker to evaluate your borrowing power and potential to buy property
It’s easy to slot in your regular expenses to ensure you’re on top of paying your rent or mortgage, your electricity bill and your phone plan. But what about those less routine expenses that crop up and eat into your finances? These can include:
• Dentist bills
• Car services or repairs
• Car registration and insurance Home repairs, eg plumbing, electricity
• Unexpected medical expenses Children’s activities/camps Gardening work
• Council rates and water bills
Make an estimate of what these expenses may cost per year, then divide this ﬁ gure by your pay cycle (whether its weekly, fortnightly or monthly). You can then set this amount aside in your ‘Bills’ account so you’re never caught short.
“Most people who are on average incomes struggle to afford the luxury of a negative cash flow portfolio on an ongoing basis”
STEP 2: CREATE A PLAN
Working in consultation with your mortgage broker, your accountant and possibly your investment advisor as well, create a plan that outlines what you want to achieve.
Let’s say your goal is to eventually own 10 properties at the age of 55. Right now, you’re 39 and you own two properties. That means you have 16 years to add eight more properties to your portfolio. If you purchase an average of one property every two years, you’ll be on track towards achieving your goal.
Can you see how a plan is starting to emerge here?
In saying that, it’s not as simple as just buying a property every two years. There are a number of strategies you can use to grow your property wealth, such as developing a house into a set of units, or renovating to add value. Becoming a successful property investor will depend on how you leverage those strategies.
Questions to ask yourself
• What do you want to achieve as an investor?
• How much wealth do you want to create?
• How many properties would you be comfortable owning?
• Are you risk averse, or are you okay with risky strategies?
• Is your partner on the same page as you/do they share the same goals as you?
STEP 3: FINE-TUNE YOUR STRATEGY
It’s one thing to have a broad plan; it’s quite another to flesh out your plan with specific actions and steps that move you closer to your outcome.
This is where having an investment advisor on your team can pay dividends, as they can look at your risk profile, your income and your goals and help to create a strategy that moves you in the right direction.
Property advisors can help you look at the bigger picture as well. For instance, many investors will buy heavily into one strategy, such as investing in capital growth properties (which are generally negatively geared). Property educator Helen Collier-Kogtevs says this strategy might work for you initially, but you have to think ahead three years, five years and 10 years to see how your situation will evolve.
“You might be able to afford a negatively geared loss of $300 a week today, but you have to factor in the risk in this strategy. What happens if you lose your job, or if the government changes its policy? How are you going to afford your negatively geared portfolio then?” she warns.
Generally speaking, Collier-Kogtevs advocates for a balanced investing strategy that allows investors to grow their portfolio without putting themselves under financial pressure.
“By a balanced property portfolio, I mean you have a balance between positive cash flow properties and negative cash flow properties to your name,” Collier-Kogtevs explains.
“If you can afford to continually take money out of your pocket each week for your investments, that’s great. But most people who are on average incomes struggle to afford the luxury of a negative cash flow portfolio on an ongoing basis.”
STEP 4: RESEARCH YOUR INVESTMENTS
You’ve got your finances in order and you’ve created a plan to guide you forward. Now it’s time to actually find the properties you want to invest in.
Get this right and you’re well on your way to a financially free retirement. But get it wrong and you could be setting yourself up for a world of pain. The secret to success here all boils down to due diligence, which is the research you do prior to making a property purchase.
“Due diligence helps you work out whether the property is a good buy or a ‘goodbye’. Many investors talk to the selling agent, ask a few questions and then make their decision – and if they can obtain ﬁ nance for the property, the transaction goes ahead,” Collier-Kogtevs says.
“I hear so many horror stories from investors who did not do their due diligence on the property before they bought it. When you’re playing with hundreds of thousands of dollars, this is not the time to cut corners!”
Collier-Kogtevs suggests you start by driving around the area you’re planning to invest in, if possible, so you can see for yourself what the most and least appealing parts of the suburb are.
“Try and put yourself in the shoes of a potential tenant and ask relevant questions – such as, does the area have transport, schools and shops close by?” she says.
“There are also many websites where you can obtain free data about the demographics of the area that you are investigating. These websites will give you all sorts of valuable information, from the population to how many people rent in that area.”
Just be sure to do your own due diligence on each and every property you are considering, because it will help you validate the information you get from sales agents and other people who have a vested interest in the sale.
“With the right education, undertaking due diligence is not as difficult as you might think – in fact it’s quite easy. Just remember that shortcuts will cost you in the end, so do it properly and thoroughly,” Collier-Kogtevs says.
MUST-ASK DUE DILIGENCE QUESTIONS
Here are some questions investors need to consider:
• How accessible are schools, shopping centres, childcare and medical facilities?
• What are the roads and public transport like?
• What are the council’s plans for the area?
• What kinds of developments are being planned for the area?
• Who lives in the suburb, ie demographics, income?
• What has been the capital growth of the area over the past 12 months, and five and 10 years?
• What is the predicted growth for the future?
• Has the specific property been tenanted before and for how long?
• Is that type of property sought after by tenants?
• What is the vacancy rate of the area?
• Is there any new infrastructure planned for the region?
• What types of homes are most popular with tenants?
• Is there evidence that the area is being gentrified?
• Are homes in the suburb being renovated and upgraded?