Formulate a plan – understand your end goals – what you want to achieve – 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 have maintained it through a number of property cycles.
Understand the difference between a salesperson and an advisor. Many salespeople 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 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 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.
There is no end to the number of people and companies that investors can consult for advice. However, most property investors fail to achieve the financial freedom they deserve, and with less than 8% ever owning more than 2 properties, a better question to ask would be…
Who should you not consult for property investment advice?
Many beginning investors think they understand real estate because they’ve lived in or rented a home or an apartment. That’s a big mistake and probably one of the reasons around fifty percent of first-time investors sell up within five years.
Friends or family. I understand why you’d do this, but the question to ask is: Are they, financial experts? How many millionaires do you have in your family? If not, don’t ask them because often their advice will be to avoid property investment, because of the “risk.”
A mortgage broker. While it’s important to have an investment savvy mortgage broker on your side helping you through the finance maze, most don't understand the property market well enough to advise on what is an “investment grade” property.
An accountant. Your accountant should advise you on tax matters and structuring, but most don't have the intimate knowledge of the property market required to give investment advice.
Financial planners. While financial planners are licensed to sell financial products, most are not able to advise on real estate. Not only because they lack a sound understanding of property, but the company they work for doesn’t allow them to. And those who do recommend property usually have a biased view as they make commissions based on the investments they sell from their “stock list.”
A property marketer. While these salespeople may seem to be on your side, they're really selling “product” for a property developer who is most likely going to make the biggest profit out of the deal.
Investment seminars and workshops. Ask yourself: Is the person conducting the event an investment expert in their field? How long have they been financially secure or do they make their money teaching others?
A property mentor. There seems to be an abundance of property mentors around - some who give great guidance, while others are really property sellers or marketers in disguise. Don’t get me wrong. I believe it's important to have mentors. They see your blind spots, give you guidance and support and expand the way you think. Just be careful who you choose and ensure they have achieved the results you want to achieve.
A buyer’s agent. These can be a great help in selecting the right property but most are just “order takers” – they don’t devise a plan that takes into account your family’s future needs and your risk profile.
So, who should you ask?
A property Strategist.
It is critical to have a trusted advisor when making property investment decisions. It’s just too hard to do it on your own or by trial and error. There’s a huge learning fee involved – of time, money, effort, and heartache.
It is interesting that while most wealthy people have, and are prepared to pay for, trusted advisors in many areas of their lives, the average person has no advisers or they get their advice from salespeople who they perceive as advisers but are far from independent.
On the other hand, following the teachings and proven systems of those who’ve already achieved what you want to achieve and who’ve retained their wealth through a number of property cycles, while not guaranteeing your success, make it much, much more likely.
A trusted advisor tailors their recommendations to your personal circumstances and warn you of the risks as well as the rewards. Their advice is not biased by any property, products or services to be sold.
So one of the first questions you should ask them is “How are you getting paid?” This will reveal a lot. If they are offering free advice, or they are being paid by a third party (such as a developer or property vendor) then their advice cannot be independent.
Your adviser should be qualified and be an investor themselves. They should have a thorough understanding of not only property but also finance, economics, and the taxation system as far as it relates to real estate investment.
Similarly, your advisor should have no properties for sale, should have a number of investment options available, depending upon your circumstances, should not make any recommendations at the first meeting, and should not create a “sense of urgency.”
Sound professional advice is never expensive. On the other hand, most investors pay a huge “learning fee” to the market by buying the wrong property, in the wrong location, at the wrong price.
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?"
Fact is, most property investors fail.
Statistics show that around 50 percent of people who buy an investment property sell up in the first five years, and of those who stay in the game, 90 percent never get past owning one or two properties.
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.
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.)
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 facelift through property development, is a great way to manufacture capital growth.
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 the property is out of favour. That’s why Warren Buffet said, “Be fearful when others are greedy and be greedy when others are fearful." 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.
The right location does the heavy lifting - Location does most of the heavy lifting for your property investment success. Around eighty percent 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.
Consider 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 – more cafés, deli and lifestyle shops.
Money, money, money
Property investing is really a game of finance so, when it comes to real estate, a sound financial 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.
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!