Top 5 questions you need to ask yourself before investing in property

Top 5 questions you need to ask yourself before investing in property

Toying with the idea of investing in property? Great! Property investment is a fabulous way to prepare a solid financial future, allowing you to live life on your terms. In order to get started, and to be successful, there are many questions you need to know the answer to before you dive in. Here are my top 5.

what’s my why?

I recall watching a Simon Sinek TED presentation a few years ago where his proposal was to “always start with the why”. Admittedly, the presentation was around brand marketing, however the premise stays true for many facets in life. Property investment is no different.

Ask yourself why you’re looking to invest in property. I’ve lost count of the number of times I’ve heard the response – to make as much money as quickly as possible!

While it’s nice in theory, property investment is not a get rich quick solution. The TV renovations where people generate huge profits are really the exception rather than the rule. In most cases investors will need to rely on the tax man, tenants, and the passage of time to let a portfolio grow in value.

Which is why your long term goal needs to be planned accordingly. Have you thought about how many properties you’ll need in retirement? What sort of cash flow will you require later in life?

The nice part of investing in property is that it provides you with future options. Buy and hold a portfolio and use the rental income for living expenses. Sell part of the portfolio to reduce debt. Retire and live in your properties. The possibilities are endless. It’s just a matter of setting a solid foundation and building from there.

In an article based on ATO data, CoreLogic‘s Cameron Kusher reported that 1,811,174 Australian’s owned a rental property with 72.8% of those having a single property interest. Compounding this, reports suggest 50-75% investors sell up within 5 years, with most citing financial issues as the reason for selling.

According to recent ABS statistics, less than 1% of property investors, or 19,198 of the approximately 2 million investors have six or more property interests.

Leading to the next question…

can i afford an investment property?

For many this will be the hardest question to answer and as a result can lead to fear, inactivity and missed opportunities.

It doesn’t need to – as long as you understand the funds you require for the initial purchase, project forward the holding costs each year, and carry a buffer of either cash or accessible equity to fund any unexpected repairs.

And don’t forget you can improve your cash flow position through the many tax deductions available in owning an investment property.

These costs can easily be mapped out prior to purchase so you, as an investor, know what you’re getting into ahead of time.

how will i finance it?

Very few investors can walk into a negotiation with a suitcase full of cash and walk out with an investment property. It stands to reason a financier will be involved at some point.

When it comes to lending there are many (many!) options available:

  • An interest only loan will result in a lower monthly repayment leaving the principle untouched.
  • A redraw/offset facility can further reduce repayments by having your everyday cash work for you.
  • Lenders will often offer further discounts with successive loans.
  • Fixing loans, as the name suggests, results in a known and “fixed” repayment every month. This can help when working to a budget.

A good mortgage broker, who takes the time to get to know your individual situation, can provide options that work for you.

In all cases be sure to explore the implications of factors that can upset your cash flow.

Know when your fixed interest or interest only periods expire. Simulate the impact of interest rate rises before you buy. Budget for higher repayments up front. That way you won’t find yourself in a position where you’re forced to sell your investment property at an inconvenient time.

where should i invest?

Excellent question! Although it can sound a little scary, I’ve always recommended investors look a little further than their own backyard.

You don’t need to drive past your investment property every second Sunday to see the property is still standing. Expand your horizons. There are many different property markets across Australia, each doing their own little thing at any given time.

It order to maximise your investment property potential you may need to look in another city, or even another state.

Many of the fantastic first time investors I’ve had the privilege to work with have purchased properties in places they’ve never visited, or have plans to visit. Why? For many reasons – the numbers stacked up, the projected growth factors were there or they couldn’t afford to invest where they live.

This may sound mortifying for many but think about this. If/when you invest in the share market do you feel the need visit the company you’re investing in?

Would you wander through and evaluate your local Coles supermarket because you’ve decided to invest in Wesfarmers? Definitely not.

The same principle can be applied to property investment.

Understand that it’s important to take the emotion out of your purchase. Weigh up your potential investments and judge them on their merits, their location and their figures.

who should i listen to?

No doubt there’s plenty of information both online and in print when it comes to property investing.

Trying to take in everyone’s opinion can be daunting, conflicting and down right confusing.

Part of being successful in property investment is building the right team around you. Include those you can build a rapport with, who you trust to look out for your best interests and who are invested in your success.

You don’t have to go it alone. Over time you’ll build a solid team around you. One where you can outsource the tasks you don’t want (or need) to take on yourself and thereby keep the balance between your investments and the more important things in life.

about tim

Tim is a property investment mentor and educator who has had the opportunity and privilege to work with hundreds of first time and seasoned investors, helping them build multi property portfolios and realise the possibilities of being successful in property. He can be contacted via email at [email protected]

Dont be an average investor

Dont be an average investor

Success in anything requires that you understand the fundamentals.

Warren Buffet has said that “the language of business is accounting”. So in this article we’ll take a look at property investment as a business and why understanding the ‘language’ is crucial if we want to succeed.

Firstly, most of us are aware that many, many people have become wealthy as a result of property investment and so it really isn’t that the strategy is unproven. A known fact  is that most people that fail don’t understand the ‘language’ and don’t have an understanding of the fundamentals prior to investing.

My friends know that I’m an AFL tragic. What would it be like if, and this applies to any sport, there was no scoreboards at games or that you couldn’t read the scoreboard? The fact is that you would find it hard to pick the winners from the losers!

Think about boarding a plane. What would you do if you just got to the doorway and saw the captain look into the cockpit and say “what the hell are all those gauges for?” Would you take your seat? No chance.

moka aviation investment

The average Australian investor can’t read the gauges – scary!

Bloomberg states that 80% of businesses fail within 18 months to two years with the main reason being poor cash flow.

Property analyst Michael Matusik states that 75% of investors sell within five years with the main reason being poor cash flow.

As my teenage girls would say, “Wait! What?”

It’s fair to say that poor cash flow can kill a business and an investment property.

So, what can we do to give ourselves every chance of being successful at property investment?

The following is a list of some factors we should consider as fundamental to ensuring we can read the gauges.

  • have a very good understanding of your family’s cash flow position and surplus (profitability)
  • allocate an amount of the family’s cash flow surplus to investment
  • perform cash flow analysis for each property being considered and ensure it falls within the cash flow amount allocated to investment
  • always include buffers for those factors that can have a negative influence on family and property investment cash flow – interest rate rises, drop in income, rental vacancy periods etc
  • ensure both personal and investment buffers are created to cover any unexpected expenses

Don’t be an average investor. It’s not that difficult to get it right!