01/02/2017
Happy CNY to all who reads this.
I read an extract from Cate Bakos which i find useful for beginners in property investment. Hope you find it useful too. ;)
The new year spurs all kinds of resolutions, I’ve seen so many over the years. From living a more minimalist lifestyle to getting fit, the list goes on. Property investors and those planning the commencement of their property journey also make New Year’s resolutions and these resolutions can be great when the resolution is fulfilled, but many fail to get past the initial wish-list. Whether it be fear, timing, limited support or outright procrastination, lots of resolutions remain just that; a wish-list item which never eventuates.
Planning isn’t always easy, and it’s not all that simple either. Lots of thought needs to go into the why, the how and the when; and that’s before investors even get to the what.
A resolution needs to be clear, meaningful, results-driven and achievable if the investor is to have any chance at meeting their goals.
To help structure some ideas, I’ve penned five initial steps for those who are serious about property investing in 2017 to consider.
1. Finance first — Get some clarity on your borrowing power, ideal loan structuring, leveraged amount (i.e. the LVR – loan-to-value ratio). The funds you have on hand – or can access from available equity – will help determine how much and when you can borrow. They should also help you work out if you can subsequently borrow again for another property or whether you’ll need to rely on saving and building equity. Without this critical step, there is little point planning anything else in the journey yet. Speak to a knowledgeable finance adviser with a proven track record for investment lending because loan setup is critical at the start, and a poorly set up loan (or wrong product) can undermine tax deductions and other benefits.
2. Ask yourself what your motivation to invest in property is based on. Try hard to quantify what it is you wish to achieve through property… is it a better financial future with less reliance on super/pension? Is it a specific passive income per annum? Could it be attaining your first home? Or is it about building wealth? Taking the focus off the number of properties or the value of your portfolio is imperative if an investor is serious about an outcome, not just a goal. The real question becomes – which properties do I need to specifically target to reach my goals? For most investors, they will be a blend of growth and cash flow properties (or moderated growth/stronger cash flow property). There is little point nominating a collection of high growth, lower rental yield, aggressive style picks if your income won’t service all of these loans. Cash flow properties are slower to grow but banks factor in the higher rental income, hence a blend may be required pending the strength of your income and surplus cash flow.
3. How long are you giving yourself to achieve your outcome? And more importantly, when you annualise the rent and then calculate the repayments, rates, insurances, maintenance and property management costs each year, is your goal going to disrupt your lifestyle? Can you afford what you have planned? And have you given yourself enough time? Property is not the best vehicle for quick profits. Cycles, downturns and buying costs shouldn’t be dismissed. I’m yet to meet an investor who has held property for more than 20 years and has complained about the growth of their asset.
4. Is part of your desire to invest based on proving something to anyone? Property investing is serious and the only person you need to impress is yourself. Ignore white noise and BBQ bragging. Work out what it is that you want out of your portfolio and set about creating a robust strategy to achieve your outcomes. Remember that life throws us all kinds of surprises too. Having a plan is important, but being able to flex on timing is just as important. I’ve seen investors lose confidence from a blip in their journey, when all they needed to do was cut themselves some slack and regain their momentum when life allows them to.
5. Don’t wait for the when once you have worked through finance and strategy. Those who try to time the market can price themselves out of the areas they had originally targeted, or worse still, can face being pushed out of the market altogether if lending restrictions preclude them from borrowing. Lenders are becoming fussier week by week when it comes to investment lending. Tougher scrutiny, tighter servicing calculators and restrictions for those whose employment is not traditional PAYG is challenging even the seasoned investors. The best time to invest is when you can.
Be prepared for dips and corrections and provision for interest rate increases, but don’t assume that every negative sentiment in the media will come true. Read various economist overviews, pay attention to RBA reports, familiarise yourself with the reasons for our market growth and contraction in the capital cities and ask professional advisers about mitigating risk on your journey.
Don’t do nothing though and then wish in five years’ time that you kept your 2017 resolution.
