When making the decision to invest in Australian real estate, there are a plethora of very important considerations within that one big decision of how, where and what to invest in.
From mistaking neighbourhood knowledge with high-quality property market knowledge… to the right allocation of investment capital in any one asset… to respecting cash flows without compromising capital growth potential… to keeping one’s own confirmation biases in check… and the ability to distinguish between perceptions and genuine risks.
As someone who has carved out a full-time career as a professional property investor, here are my Top 10 guiding principles to help property investors to stick between the flags.
1. Remain focused on the Big-Picture
- Visualise what you want your future to look like.
- Assign numerical values to things like the value of your dream home and the annual income you’ll need to support the lifestyle that you’d like to live at (say) age 60.
- Don’t allow yourself to get distracted from making that next important step towards achieving your Big-Picture goal. Those who allow the worries of the world to second guess whether it is a ‘good time’ to invest in their future are squashing their own potential.
2. Financial framework
- To rely solely on superannuation as the primary resource is to accept mediocrity. Assume control of your future by consistently investing outside of superannuation.
- Wrap some structure around your financial management. Simple things like compartmentalising certain monies in a specific account for a specific purpose and using a series of direct debits to automate your budget.
- Ensure that no less than 20 percent of your salary is allocated to your future. Initially this may be as simple as a direct debit from your salary account to an out-of-mind-out-of-sight savings account. Over time, it should include electing to pay more than required off your home loan and allocating a specific amount each month to support your investment portfolio.
- Mixing investment decisions with personal biases and emotions is a combination as bad as sandals and socks. Do this instead.
- When done well, property investors make intelligent decisions by assessing real estate potential through the lens of a ‘financial instrument’, as opposed to ‘your home’. The primary focus should never be on the ‘bricks and mortar’ and the various (highly subjective) considerations that are important to you as an owner-occupier.
- Whether a location is a capital city or regional location, coastal or inland, warm or cool climate is as subjective as t-bone, tofu and trout. Here’s 144 locations where house prices tripled.
- As with life in general, resilience is important for achieving financial success over the long term. Expect setbacks. Every experience is an opportunity to learn. One backwards step which subsequently becomes 2-steps forward is far better than taking no steps at all.
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4. Most valuable resources are ‘free’
- Time: 24-hours in every day, 7-days in every week… it is what one does with them that counts most. For anyone who values financial independence, the right ‘time’ to invest will always be as soon as one can afford to. Propertyology’s role is to help you with the ‘where’.
- Leverage: the ability to purchase a valuable income-producing asset with a relatively small deposit is possibly the most powerful financial resource of all. Respect the safety guidelines but, make no mistake, debt is a great ‘vehicle’ that gets one from ‘A’ to ‘B’ much quicker than walking.
- Compounding: from little things, big things grow. Imagine buying an investment property for $600,000 using an initial deposit / equity of just $60,000 (10 percent). If that asset increased in value by an average of just 0.6 percent per month (7.2 percent per year), the asset will have doubled in value to $1.2 million after 10-years. In this example, the initial $60,000 equity would have grown to $660,000 – a 1,000 percent return on the initial investment [refer Case Study].
- Debt structuring: understand the difference between ‘good debt’ and ‘bad debt’, the huge benefits of mortgage offset accounts and the importance of not allowing banks to cross-collatoralise assets.
5. Respect #1 golden financial rule
- In business, on the stock market, or as a property investor, all good financial decisions respect the importance of not having too many eggs in one basket. For me, this means:
- not investing any more than (say) $750,000 on any one real estate asset,
- intentionally turning one’s focus away from the town that their family home is in,
- strategically spreading investment capital across multiple cities / states [refer above example],
- one’s total investment portfolio not having too much exposure to any one industry sector (have a balanced spread of tourism, manufacturing, education, mining, agriculture, etc)
6. 100% of your options
- Australia consists of 400 individual townships, including 200 that have a population of 10,000 or more. The most intelligent property investors are ‘borderless’ and they (objectively) consider the credentials of the entire 200.
- Do not follow the herd. Those who do what everyone else does will end up in the same paddock as the rest of the sheep.
- Decades of evidence proves that the best-performed property markets each year usually are not the locations with highest profiles or the so-called ‘hotspots’ that the herd were trumpeting. To prove a point, compare what ‘the herd’ were saying at the end of 2016 to what actually happened (below) over the following 5-years
7. Respect cash flow
- The probability for most people is that personal salaries and rental incomes will increase over time. That said, to mitigate against unexpected changing conditions it is wise to stress-test one’s own situation for things such as variations to salary, rental income received 48 out of 52 weeks and an interest rate buffer of 1.5 percent.
- Rental yield is important, but it is not the primary goal. Investing in real estate requires a long-term focus (10-20 years). The value of an asset can increase significantly more over time (capital growth) than the cash flow from an asset can increase by. Remembering that equity can be converted into cash down the track, selecting assets for capital growth potential with a secondary eye on cash flow has a greater chance of achieving the end goal than assets which are (say) cash flow positive by $2,000 per year but produce very little capital growth [refer below example].
8. Information sources
- Don’t confuse ‘reading stuff on the net’ with ‘quality research’. Much of the information about property markets and investing that can be found from one’s device is as useful as an ashtray on a motorbike.
- There will never be a shortage of opinions about property markets. The small few who are genuine experts at analysing property markets and buying properties for investors will have copious amounts of proof on public display.
- Understand the difference between ‘lagging’ and ‘leading’ indicators.
9. Growth drivers
- Without going too deep into the weeds, the biggest influences which segregate the performance of property markets from one city to another are a series of local economic factors and local supply factors.
- Just as PRESSURE turns coal into diamonds, it also turns real estate into wealth.
- Property markets are one of the most complicated things on the planet. One can’t possibly know what one does not know. DIY at one’s peril.
10. Biggest myths
- MYTH #1: Capital city locations produce more capital growth and are safer than regional locations – absolute BS.
- MYTH #2: Population growth has the biggest influence on property price growth – this myth is not supported by evidence.
- MYTH #3: Real estate ‘hotspots’ are confined to targeted suburbs (aka ‘imaginary lines on a map’) – not true.
- MYTH #4: The newer the property the better for investors – the best investment I ever made was in a property that is more than 100-years old (how do you like these apples?)
DISCLAIMER: The information in this document is general in nature, is published in good faith, and does not constitute personal advice.
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