Investing in property
The 10 fundamental principles of property investing should be part of your real estate strategy. Generally, you invest in real estate to increase your wealth and secure your financial future. Real estate investing requires an examination of the fundamentals and they determine long-term performance.
When you buy real estate as an investment you can map the following points across your property choice:
- Invest for cash flow
- Ensure the property is cash flow positive after all costs as that makes the investment work from day one.
- Negative gearing is for those that have super high incomes and need to offset that tax. For most cash flow is king.
- Buy for yield, not capital appreciation
- Many investors focus on capital appreciation exclusively. Underestimating funding the shortfalls in running a property portfolio is a mistake and a very high-risk strategy.
- Buy real estate on the basis that property prices will never rise, meaning your model is based on instant profitability – income from rent NOT just growth.
- Remove emotion – an asset is a thing, not a person. Write out a plan and don’t deviate from that plan. If aesthetics is not on the plan ignore the ‘pretty’ features. If the ‘features’ do not increase yield don’t be influenced.
- Always buy below market value (BMV)
- Securing equity at the point of purchase rather than a ‘buy and hope’ strategy will insulate you against market falling.
- Equity also allows you to recycle your deposit and reinvest.
- Due Diligence
- Get a pest and building report to check the property’s structure is sound.
- Check and confirm that the numbers are true by accessing the sales and rental assessments.
- Ensure that your reno costs will stack up determining what the property be worth renovating.
- Add the cost of rates, management fees, strata fees, increases to interest rates to your calculations. Is the rent covering all this?
- Stick to your strategy don’t work out a strategy to suit the deal. Ask, Does the property suit your deal profile? How will this property help you achieve your goals? Are you buying on numbers or emotion?
- You should know how much money you are going to make from the deal before you even buy the property.
- Adding value
- Increase the value of the property above the cost of works by choosing dirty-ugly properties that are generally cheaper.
- Have a cash buffer
- Having a cash buffer of five to six mortgages payments on each property. Also, ensure you have Landlord Insurances that cover everything that could potentially go wrong.
- Invest for the long term
- Selling investments should be reserved for poor-performing assets and liquidity – so avoid selling just because you see a profit.
- Past property cycles consistently show that property prices increase in value over time. Selling your properties reduces your asset base and long-term wealth.
- Buy existing older properties and stick to what you know
- New Build property, Off Plan property, Overseas Property, Cashbacks, Rentbacks are best reserved for those investors that specialize in those types of investments.
- Existing older property has less risk. There is less value speculation, less smoke and mirrors and no language or legal barriers.
- Match your target rental audience
- It is crucial to buy an investment that matches your target rental audience – students, professionals, families. You must ensure the needs of your target tenants are met through amenities, schools, work, transport technologies and recreation.
- If you have minimal capital of your own to invest, then borrowing is required.
- Buying in regional areas will definitely require a deposit of 20% or more as regional properties have different lending criteria. Stick to sensible loan to value ratios (50% to 70%) and do not over to under utilise leverage.
The fundamentals of investing are basically a blueprint that you map across your investment choices. Just like architectural plans, they keep you focused and on track. Next week in the final part of investing in property we look at ‘expert opinions’ and how to determine what is rubbish and what will help.