If planned properly, an investment portfolio can set you up for a comfortable, early retirement. A strong property investment strategy relies on two key factors: choosing the right property and managing cash flow.
Choosing the right property
1. Choose the right property at the right price
Property is a long-term investment, so you need to be sure you’re picking the right property. You want to be certain that the property will increase in value over time. This is why you should always buy in an area you’re very familiar with. There are a lot of factors that can impact house prices, and knowing the area will help you avoid some of those problems and capitalise on areas of future growth.
Make sure you look at a lot of properties. You can usually only buy one property at a time, and the idea is to hold on to it for a while, so you want to make sure it’s the right one. Choosing the wrong investment will set your plans back and potentially cost you opportunities in the future, so do your homework. Looking at lots of properties should also help you resist the urge to purchase a property based on emotional connection.
2. Understand the market and dynamics where you are buying
It could be that rental prices are higher in the area you’re buying because there are a lot of university students who live there. But is your property suited for university students? Is it near the campus? Is it on public transport routes, and if so, how many routes is it near (in case they are changed after you buy). Who are these people, and where are they going? That’s what you need to ask of your intended tenants.
If you’re focused on a rental suitable for a family, know where the schools are (and which are the good schools). Parents putting children through school can make for great long-term tenants, so buying in a growth area near the good schools can be a wise move. If you’re not familiar with the schools (but you know the general area quite well), don’t be shy to ask the neighbours and local real estate agents what they think (meeting the neighbours is also a good way to gauge the neighbourhood).
3. You vs. Them
There are plenty of people who stand to profit if you purchase a property, especially if it’s overpriced. These people aren’t always looking out for your interests (or your bottom line), they’re looking out for their own! This is why it’s crucial to have the right people on your team, such as your own valuers and property/pest inspectors. This will stop you from getting caught up with sketchy operators, and if they’re local, you can ask questions about the area.
It also pays to have a great property manager on your team, who will look after your interests after the property has been purchased. They’ll let you know how the property is going, and a good property manager can communicate potential hiccups to you in a timely manner. Strong communication is non-negotiable in a property manager, so make sure they’re responding to you in a timely manner. If they aren’t responding to you when you’re a brand new client, why would it change once your relationship is established?
Cash flow and management
4. Make your equity work
If you’re already a property owner, don’t be afraid to dip into your current mortgage’s equity to fund investment portfolio expansion. Accessing your equity might give you access to a larger loan, and the purchase of that second property will then give you access to more equity in turn (especially if you’ve managed to find an investment property in an area that will see quick value increases). But before you go and start looking at more expensive properties, know that banks will only lend to 80% of your current property value, less the outstanding amount.
For example, if your current property is worth $400,000 and you still owe $200,000, you might assume you have $200,000 in equity. However, $400,000 * 80% is $320,000, from which you subtract the $200,000, meaning you will have access to $120,000 equity. Of course, if it’s been a while since your property has been valued, the numbers might be completely different, so it’s worth talking to a professional about your options.
5. Know your expenses
While quick maths might suggest a quick profit (i.e. your mortgage repayments are less than the rent), there are expenses associated with owning an investment property. It is smart to calculate (or have a professional calculate) the potential expenses, so you don’t wind up owing money each week when you thought you were going to be making it.
If you’re negative gearing (i.e. purchasing a property that will make you a loss on paper), make sure you can control your losses as much as you need to, and ensure you understand the tax implications. Investment is a great long-term strategy to make money, but if it starts affecting your day-to-day living (or puts your own home at risk), it might be worth reviewing your approach.
While investment properties can be relatively inexpensive to fund (after factoring for rent income and given that a number of related expenses are tax deductible), it’s important to know what you will have to pay, and how much it will cost you per week (and how that changes if you don’t have tenants). Watching expenses over time is also a good strategy; if the market changes, you might benefit from checking your mortgage and interest rate to make sure they’re still doing the best they can for you.
As an investment portfolio is a long-term strategy, making careful steps will put you in a great position for the future. No two properties will ever be the same, but careful planning and research on not only your properties but also your financial options will help pave the way for an easier, more profitable future.
