Property investment is simple, but not easy and that’s not a play on words. It’s not something you should enter into lightly, but for some reason, that’s what a lot of people who have dreams of making millions with real estate do.
They think, “I can go out, buy a house somewhere, stick in some tenants to pay the mortgage and make a killing! How hard can it be?”
So if you’re looking to get into property or move up to the next rung of the property ladder, here are some words of advice from Michael Yardney, CEO of Metropole Property Strategists:
1. Knowledge is property investment power
Firstly, you need to understand what makes an “investment grade” property and recognise that not just any old digs will do.
You can profit from real estate in one of four ways, and if you get the combination right you’ll make money from bricks and mortar. They are;
- Capital Growth – to build yourself a sound asset base your properties will need to appreciate in value at above average capital growth. This will come from strong demand from owner occupiers (who push up property values) and tenants (who help you pay your mortgage.)
- Cash Flow –in other words your rent.
- Tax benefits –however you should never invest solely for this reason.
- Accelerated Growth –getting your hands a little dirty (metaphorically speaking) by investing in a property that needs a bit of cosmetic TLC through renovations is a great way to manufacture capital growth.
2. Understand the market moves in cycles
While timing the market is not the be all and end all, it certainly helps to understand how the property market moves in cycles.
Having said that, if you’re into real estate for the long haul (and that’s really the only way to play the property game) then time in the market (owning a property that will outperform the averages in the long term) will trump trying to time the market.
3. The right location does the heavy lifting
Location does most of the heavy lifting for your property investment success.
Around 80% of your property’s performance will be due to buying in the right location and the balance by owing the right property, an “investment grade” property that suits the fundamental demographic in that location.
So look for a location that has a long history of strong capital growth and one that will continue to outperform the averages because of the demographics in the area.
This will be a location where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes.
In general, these are the more affluent inner and middle ring suburbs of our big capital cities.
Within that suburb, look for proximity to amenities like public transport, shops, schools and lifestyle amenities.
You may also wish to buy in areas going through gentrification – a suburb that is relatively cheap now but that has the potential for capital growth in the future as a wealthy demographic of people move in.
4. Money, money, money
Property investing is really a game of finance so, when it comes to real estate, a sound finance strategy is just as important as a sound property strategy.
Without a well-rounded understanding of how to maximise your borrowing power, use equity as a leverage to build your portfolio and maintain a financial buffer to see you through the difficult times that we all ultimately face, you’re setting yourself up to fail financially.
5. Develop financial fluency
While it’s relatively easy to make lots of money through property investment, many people still manage to lose it all.
If you are financially illiterate when it comes to managing money, budgeting or balancing the books at home, how do you think you’ll go when it comes to managing a multi-million dollar property portfolio?
You may need to be money smart and learn the ins and outs of budgeting, taxation and the financial advantages you can enjoy as an investor, as well as the best structures to own your investments in.
Rather than trying to learn it all yourself and wear numerous hats, it’s worth surrounding yourself with a good team of professionals who can guide you with their knowledge and expertise.
An independent property strategist, a finance broker and an accountant should all be people you rely on to support you in the journey to real estate riches.
If you’re the smartest person on your team, you’re in trouble!
The Bottom Line:
The residential property market is worth well over six trillion dollars today and over the next decade it will increase in value by billions and billions of dollars.
If you get it right, you can have your share.
Author: Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.