PROPERTY INVESTING HAS CHANGED…
The world of real estate has been governed for years by one dominant strain of thought. i.e., in order to buy and hold property successfully, the average person must have excellent credit, a strong financial statement, good income, lots of money for a substantial down payment, and strong collaborative support from the hard-money lenders.
However, our changing society has meant that the “old” method of investing in property is no longer applicable in modern world Investors can now obtain loans easily, use existing equity, have multi-currency loans, get professional property management, and buy in a variety of cities and price ranges.
GET ALL THE FACTS
Industry research has revealed that there are 5 common errors many investors make when investing in property if handled correctly, these issues can have a dramatic impact on the investment’s overall performance.
1 BUYING THE “WRONG” PROPERTY.
At first glance this seems logical of course. You try not to buy the “wrong” property.
However, on further study, what can actually be defined as the “wrong” property?
After all, every week in the world thousands of properties are bought and sold for investment. And they are all different. So what is the “wrong” (or the “right”) type of property?
Some people buy only 2 bedroom apartments as “they are the best to rent out”.
Well, let’s look at that for a moment. While this argument is sound, it’s not always true. In a block of 200 apartments, of which there are 195 two bedders, and just 5 one bedroom units, the one-bedroom may well be the better investment because of the rarity factor.
But not if the adjoining two blocks are all one bedroom apartments! So hopefully you can see that there is in fact no “right” type of property – but, it is important you buy for the right reasons.
One well known and extremely successful residential investor says he has “Never seen” inside any of his rental properties before buying, claiming he would be so dismayed by the size, condition etc that he would never buy if he saw inside! He bases all his decisions on the figures, as well as other fundamentals of supply and demand, occupancy rates, ease of financing etc.
Research has shown that nearly 60 per cent of investors say they buy an investment property that “they could live in themselves”. Nearly twenty percent of investors select a property on the basis of “they may move into it in the future”, while only 8 per cent say they bought it to make a capital gain!
Yet historically property in and around the capital cities has always moved up in value, giving investors capital growth. Yet only 8% of investors went into the property with this in mind.
These statistics raise two important issues all investors need to be aware of. Many investors are buying emotionally. They are buying properties that they “could live in themselves”. The rationalize that if they like it, “others will to”.
Yet, they may be professionals in their late 40’s, while their prospective tenants are young single yuppies. Buying a property they like, may not appeal to their future tenants.
Second, people invest because they love the property. They should invest because they love the prospects of the property achieving above average capital growth and rental income.
Are you buying for 3, 5 or a 20 year investment? Is your main aim high rental return, or capital growth?
The answers to these questions will determine to some extent the type of property you buy.
2. BUYING IN THE WRONG AREA.
Everybody has heard of “Location Location Location” being all important for real estate investors.
And there is nothing wrong if you base all your investment decisions just on this single criterion alone. You’ll do very well. However, the world is changing. Investment strategy needs to change also.
Let’s take Australia for instance;
The Australian Bureau of Statistics is forecasting an upper-level population of 28.2 million, and a lower level of 24.1 million by 2051 (currently 19.4 million).
Net migration into Australia has been averaging around 100,000 people annually. If Australia’s population grew in the 21st Century at the same 1.65% per annum rate it grew in the 20 Century, by 2100 the population would be 100 million.
The three major states of NSW, Queensland and Victoria account for 77.5% of the population. Queensland is expected to overtake Victoria’s population around the end of the first quarter of this century. West Australia is forecast to have the fastest growth over the next 5 years at 2.3% per annum, while South Australia (and Tasmania) are expected to have little, if any, growth. NSW should continue at around 1.2%. Melbourne is forecast to grow by up to one million more people in the next 30 years. Australian Society is not only ageing, but it is also becoming more diverse in attitude, behaviour and lifestyle, posing increasing challenges for investors.
Australia’s National Housing Strategy identified that household structures were changing as a result of ageing, lifestyles and ever increasing incomes.
One and two person households are increasing inexorably in Australia, and now represent more than half of all households. There are 1.5 million households in Australia with just one person.
And yet many investors will not buy one bedroom apartments. Experience teaches us these have outstanding occupancy rates with renters.
Many renters may well prefer a 2 bedroom flat, but can not afford it. They then look to a one bedroom flat, but because of the scarcity of these, end up having to share a 2 bedroom with someone else. Which may not be their preferred option? This is a much overlooked aspect by investors.
Families are changing too. Couples with children represent just over a third of all households.
All data points to the continuing demand for smaller properties closer into the city. The younger generation is flocking to be closer to the city.
However, the traditional family unit requires a “house with garden”, and new estates catering to this market at affordable prices is booming.
Many investors make the mistake of assuming that “the city” means the Central Business District (CBD), when the inner area suburbs are in many cases more lively, affordable and popular. Many people are flocking to these trendy, “café style” suburbs near the CBD’s, as opposed to living right in the city centre.
Then there is the “ripple effect”. As prices go up in one area, the adjoining area is the next to benefit. Just because one area had good growth last year, don’t assume it will have good growth next year. It may….. But it may make the adjoining area more affordable.
This applies city to city, as well as suburb to suburb. Don’t base your investment decision on somewhere you enjoyed on holidays, reasoning that because you liked it “others will to”.
You must try to see what type of property tenants are demanding, what is the occupancy rate, and what are the future trends.
A one bedroom apartment located in a prime inner suburb may not be what “you would live in”, but could well prove to be a better investment than a mansion until in a country town. Be careful of your own preconceived ideas of what people want. A family home in a middle distance suburb may in fact be the last place you would live in, but thousands of people are desperate to get into these.
3. WAITING FOR THE “RIGHT TIME TO INVEST”.
Perhaps not surprisingly, this is a very common error.
There are two reasons for this. First, normal procrastination. It’s often easier to make no decision than an active decision.
Secondly, many people are nervous about making the wrong decision based in timing, therefore prefer to make no decision, and use the excuse of “watching the market”.
Assuming the market peaks once every 7 to 12 years, that leaves an awful lot of years when you can buy, and still enjoy substantial growth.
But it is not easy to know when the market is peaking. Few investors sold in October 1987, as the market peaked. Few investors were buying in Sydney pre-Olympics.
That has been an expensive mistake for many.
Real Estate author Jan Somers says:
There is so much to be learned from these people who have been investing in property for a long time. One thing they all tell you is: if you wait for the right time to buy, you’ll never buy anything at all. And if you sell when everyone says sell, you’ll never have anything at all. The trick is to buy whenever you can afford to. In other words, buy when it suits you financially, not when it’s economically correct.”
Fred Johnson, author of the “Wealth Power of Property” has this to say about waiting for the right time to invest:-
“Consistently throughout the past 45 years, people have been telling me that it’s not a good time to invest in property. In the early 50s when a home loan was as rare as hens’ teeth, they said – it’s not a good time to buy; there is no money available; prices will not rise. In the late 50s when exports were flagging, they said the economy was heading for disaster: don’t buy property, interest rates were going up, import quotas were being cut and world prices for wool and wheat had dropped.
“In the late 60s, Great Britain, our biggest export customer, was negotiating to join the EEC. Menzies raced to London to point out the error of their ways. He was unsuccessful and proclaimed that Great Britain’s entry to the EEC would make previous recessions look like a boom. Don’t invest in property now, they said.
“The early 70s saw low inflation. Property would not increase in value, they said. Then in the mid 70s, there was high inflation, high unemployment and then recession. The OPEC oil crisis of the late 70s caused the “experts” to say that property prices would drop as people and industry could not survive the expansion of our cities as oil prices soared. Property was out of fashion once again.
“The abolition of negative gearing in the mid 80s had people saying – don’t buy property now, there’s no tax advantages. In the early 90s we had another recession and low inflation with a flood of headlines such as “values cannot rise when inflation is low”. Consistently for the past 45 years, “experts” have been telling me that the time is not right to invest in property. Assuming you have sought out the right information, the biggest mistake you can make is not to own any investment property at all.”
4. FINANCING ERRORS.
Many people try to pay off the mortgage as soon as possible, using spare cash to reduce their loan.
Whilst understandable, this is not always be the best investment strategy.
That extra money could be used for further investments. Paying it off quickly does not make good sense from an investment point of view.
Many people buy an investment property, rent it out, then put it away “in the top draw” for the future.
They only look at it again if it becomes empty or vacant for a long time!
However, a little simple tax planning and structuring of your investment can help ensure you never pay any tax on your rental income, and pay little or no capital gains tax if you sell.
Taking the correct loan can mean not only no monthly outlays, it can also mean that you may be able to purchase further properties, and can give you greater holding power.
Some key points to consider:-
Think about your long-term investment strategy to determine the type of mortgage to best suit your needs.
There are a number of questions you should be asking yourself before you commit to a certain types of mortgage. How long will you own this property? Will you always rent it out? Do you want to buy several properties, or even a portfolio? Or will this be your only investment property?
What direction are interest rates going in, and how quickly? Is your income expected to change (up-down) during the course of you holding this property?
The answers to these and other questions will help you determine the most appropriate mortgage you should be seeking.
Mortgage options these days are very flexible – there are principal and interest fixed and floating rate loans, redraw facilities, back-to-back loans, multi-currency options, flexible repayment investment loans, introductory rate loans, combination loans, all in one loans, standard variable loans and several others.
Rather than approaching numerous banks direct or talking to investment advisors, seriously consider dealing with an independent mortgage expert, who is dealing directly with the banks. Enlisting their services can make a significant difference in the cost and effectiveness of the mortgage you obtain. They can often make the process faster thereby avoiding costly delays. Typically, there is no cost to the borrower.
Also consider getting a preapproval, which these days are fast, easy and cheap. Mortgage Specialists can usually get you preapproval in just days, and you are then ready to move immediately on any outstanding opportunity.
Try to buy with a reasonably low deposit of 20% or 25% as then you can take advantage of the massive benefits of leverage in a rising market.
Consider an “Investment Loan” instead of a standard principal and interest repayment vehicle.
These are generally the best type of loans for investors.
5. SELLING TOO SOON
This is one of the most common mistakes investors make.
A survey revealed that over 30% of all investors sold within the first 5 years of ownership, with another 20% intending to “sell soon.”
That means nearly 50% of investors will sell their investment property within the first 7 years of ownership.
The property market moves in cycles, and the longer you hold the more “cycles” you can benefit from. By holding for the long term you get the magnified effect of compound growth.
You can ride out any downturns. You can “add value” by renovating and refurbishing when the property is older.
As the value rises, you can refinance and buy further investments without outlaying any additional cash.
By buying and holding, you avoid the substantial costs involved in buying and selling too quickly.
Property will continue to provide good returns, security and wealth for those who embark on a planned acquisition program of property investment, especially if they continually add to their portfolio.
By selling within 5 years, you barely take advantage of even a single cycle.
Property is an excellent investment. Not only is it much harder to lose money in property than the stock market, but you can continue to receive ever increasing income from rent, and benefit also from capital growth.
No part of this document or its contents is intended to provide tax, financial or legal advice, and any statements referring to these areas are to be considered opinion only. All recipients are encouraged to take independent tax, financial or legal advice from duly regulated sources.
