Property investment 101 for rookies

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?”

The fact is most property investors fail.

Statistics show that around 50% of people who buy an investment property sell up in the first five years, and of those who stay in the game, 90% never get past owning one or two properties.

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.

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 wealth-building rates (in other words, 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. While you should never invest solely for this reason, a good tax strategy can help you manage your cash flow, decrease your tax obligations and increase your bottom line.
• Accelerated growth. Getting your hands a little dirty (metaphorically speaking) by investing in a property that needs a bit of cosmetic TLC through renovations, or a major face lift through property development, 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.

Following the herd and buying when everyone else is on the property bandwagon doesn’t always work. That’s often when the market is near its peak.

On the other hand, you have more chance of nabbing a good deal in a buyer’s market when property is out of favour. That’s why Warren Buffet said, “Be fearful when others are greedy and be greedy when others are fearful”.

Having said that, over the years I’ve changed my view on timing the market, especially if you’re an established investor.

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 timing the market (making a one-off capital gain, but then often missing out on strong, long-term growth because you’ve bought in the wrong location).

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 will come from owing the right property—an “investment grade” property that suits the fundamental demographic in that location.

So I 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 I look for proximity to amenities like public transport, shops, schools and lifestyle amenities.

I also like buying 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.

One way to find this type of location is to drive through the streets and look for some of the obvious indicators that people with money are moving in:

• Are people spending large amounts of money on renovating/extending their homes?
• Are there small black (or maybe now it’s white – the new black) BMWs and Audis parked in the driveways or are they old Ford Falcons and Holden utes?
• Is the nature of the shops changing? Are there more cafés, delis and lifestyle shops?

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.

It’s important to set aside a cash flow buffer in a facility such as an offset account or Line of Credit, to cover you for a rainy day.

5. Develop financial fluency

While it can be 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 multimillion-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!

Some final words of advice (or warning) for investors

Formulate a plan. Understand your end goals—what you want to achieve—and then make investment decisions accordingly.

Be cautious. You’ll find everyone is happy to give you advice. Rather than listening to well-meaning friends, it’s important to only listen to people who have achieved the financial independence you’re looking for and who’ve maintained it through a number of property cycles.

Understand the difference between a sales person and an advisor. Many sales people are cloaked as advisors and while they suggest they’re representing you, in fact they are representing the seller or a property developer. Only take advice from someone who is independent and unbiased, rather than someone who is trying to sell you something.

Be prepared to pay for advice. I’ve find that good advice is never expensive. In fact, it’s much cheaper than learning from your mistakes.

Not everything that glitters is gold. Often when you start out it can be tempting to see opportunities everywhere. The problem is you don’t yet have the perspective to decide what is a good investment and what is not. Property doesn’t discriminate; it doesn’t care who owns it.

The residential property market is worth well over $6 trillion 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.

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.