Often for new investors it is hard to know where to start or which strategy to use. In this four-part article we look at common tactics first-time investors adopt and whether they are right for you. Triana O’Keefe reports.
So you have decided to invest in property? Congratulations! The journey you are about to embark on is an exhilarating one that can lead you down a very profitable path if you play your cards right.
While investing in property is relatively straightforward, it is important to understand that it is not always going to be easy. In fact, there are going to be trials and tribulations along the way that will test your drive to succeed. However, with strong foundations and clear goals outlined, you have every chance to achieve your dream – whether it is a healthy rental income stream allowing you to quit your job and travel the world, or it is to hold your properties to harness maximum capital growth.
Build your team
As a property investor, you will need to become proactive in your investment decisions and be comfortable knowing the success of your journey will ultimately be your responsibility.
If you are like the majority of property investors who are conducting their property business part-time while still being employed on a full-time basis, then it becomes critical that you learn how to leverage your time and capacity.
The best way to do this when starting out is by allocating a good proportion of your time to carefully selecting and then managing your team of advisors. To be successful, you need to assemble the best team you possibly can, and there are a number of key players.
To advise you on asset protection and taxation.
• Architect or draftsman
If you are interested in renovations or developments.
If you are interested in pursuing more active property strategies like renovations or developments.
• Buyer’s agent
To assist you with your property selection and negotiations.
You may need multiple buyers’ agents if you plan on investing interstate.
• Insurance broker
To assist you with public liability insurance, landlord insurance, home and contents insurance, etc.
To help you with setting up the correct structures to invest in and conveyancing.
You can learn a lot from reading books or magazines, watching DVDs and attending seminars, but finding an experienced investor who has already achieved what you want is priceless. Never underestimate the power of experience.
• Mortgage broker
To help plan your debt structure
to maximise your potential as a property investor and manage your financing risk.
• Property manager
To assist you with finding tenants and with the management of your properties.
• Town planner
To assist you with getting renovation or development applications through the local council.
Set your goals
Creating wealth through property tends to be a very emotional subject for many people. When you are considering spending many hundreds of thousands of dollars, and using your own hard-earned savings to get a mortgage, it’s hard not to be emotional.
The key is understanding when emotions need to be avoided. One
of the most successful, tried and true ways to combat emotion is by setting goals and implementing regulated systems.
However, in order for a goal to inspire you, you have to define it first.
What does success look like to you? If your goal is financial freedom, what does that mean? How much money do you need?
Having a goal of financial success is just a fuzzy concept if you don’t articulate what it means in quantifiable terms, as in how much money you want in order to feel successful.
As a beginner investor, it is important to define each process and outline achievable, yet challenging goals every step of the way. If you are just starting out, your short-term goal might include saving $15,000 for a deposit or reducing your debt by $5,000 a year, while your three-year goal might be to purchase your first property and start working on your second or third deal.
Know the risks
Like all investment options, property carries some risks. Before you commit, you need to be aware of what can go wrong when investing in property.
• Transaction time –
Unlike shares where you can cash out any time you like, property takes longer to sell. If you need cash in a hurry, you could be forced to sell at a much lower price than you were hoping for.
• Transaction costs –
Unlike shares and other asset classes, you need to spend tens of thousands of dollars to pay the entry cost of buying property
, and then several tens of thousands when you exit.
• Property vacancies –
If your property becomes vacant and you are unable to find an immediate replacement, you could face a cash flow squeeze that could lead to default or forced sales.
• Interest rate rises –
When interest rates increase, your repayments also increase, and this can put a strain on your cash flow.
• Property performance –
If you didn’t do enough due diligence and bought the ‘wrong’ property in the wrong area at the wrong time, you could face years of slow or no growth, or worse, no income due to high vacancies in the area.
You can tell a lot about an expert by their client base.
In general, you should seek advice from advisors who have been specifically servicing property investors for a number of years. Dealing with an experienced professional means you won’t become a guinea pig for an advisor looking to branch out.
• Unemployment –
If for any number of reasons you lose your job, you may be at risk of losing your home or investment.
While this list of risks may seem serious and scary to new investors, it is important to note that the benefits often far outweigh the risks.
• Leverage –
Property offers more financial leverage, and the more leverage you have, the more quickly you can build wealth.
• Simpler than you think –
While it can be daunting at first, as long as you have your finances in order, you can start doing your research to find the right property.
• Control –
Unlike other investment classes, property offers you many options in terms of growing value and income on your property. You also have control over where you buy, how you buy and when to sell.
• Stability –
Real estate is less volatile than stocks or mutual funds, especially in uncertain economic times.
• Tax deductions –
While tax benefits should not be the deciding factor for entering into property investment, they can offer substantial deductions to help reduce your yearly tax bill.
• Equity –
By holding your investment until it has sufficient equity to purchase another property, you can grow your portfolio without having to raise the cash for multiple deposits.
Understand the cost
First-time property investors start out with the best intentions and they know that to grow their money they need to invest it. However, many assume a 10% deposit will be all they need to break into the market. They scrimp and save, work double shifts – and often two jobs – to scrape together a $30,000 deposit, only to realise there are other significant upfront and ongoing costs involved.
10 MISTAKES FIRST-TIME INVESTORS MAKE
1. Not knowing the fundamentals of a prospective market
2. Not looking past their first investment property
3. Being swayed by emotion Underestimating the costs
4. Not having the right loan structure
5. Not having a budget or buffer
6. Skipping due diligence
7. Not getting second opinions
8. Doing their own taxes
• Stamp duty – Imposed by
the state government on all property purchases and varies wildly between states.
– Handles the legal aspects of the property transaction.
• Land tax
– Another state-based tax that varies across Australia. COST: Can be up to $15,000 in NSW, while NT is exempt
• Lenders mortgage insurance – Only applicable if you are borrowing more than 80% of your property’s value. This insures the lender if you default on your loan.
COST: Upwards of $6,000
• Building and pest inspections
An important part of your due diligence that can save you thousands in the long run.
– Includes building, contents, landlords and mortgage protection insurance.
• Property management
– This will be deducted from your weekly rent and will need to be accounted for in your budget.
COST: $300+ per year, plus 10% of each month’s rent
• Body corporate
– Most units are part of a body corporate, which comes with a hefty price tag. COST: $1,000+ per year or more if you choose a building with the added ‘extras’ of lifts, gym, pool, etc.
– You should prepare for a minimum two-week period during which your property could be untenanted.
• Ongoing property maintenance
– Plumbing, electrical, appliances, etc.
No time like the present
One of the most common regrets we hear from all types of investors is that they didn’t start their journey sooner. The attitude of many new investors is to wait to find ‘the one’ – that perfect property to kick-start their portfolio and make them rich. The truth is, while property prices in Australia won’t always get cheaper, you will, however, always continue to find reasons why the next one might be a better time for you to enter the market.
Yes, you could look back to a year earlier and think it would have been better if you had waited. But that’s hindsight, and nobody can ever truly predict exactly when is the best time to buy property.
If you trust your advisors, do your research and outline your goals, the confidence to jump into the investment property world will follow.
Next we discuss some of the strategies new investors may choose to implement, and whether they are right for you.
Low-Income Earners Can Invest In Property
Cash Is King: What you need to know about investing in cash flow properties
Building a Nest Egg Through Capital Growth