One-size-fits-all property investment is false - JULY 2018
July 26, 2018 / Written by Rich Harvey
There is a dangerous suggestion made by some property investment advisors that if anyone adopts their ‘patented’ approach to building a portfolio, a rich retirement awaits.
This is the one-size-fits-all fallacy that doesn’t hold up to scrutiny.
First up, let’s simplify the argument.
You’re getting ready for a ski trip and need a new pair of boots. What do you do?
Most of us get online and do some background work. You’ll probably scope out the merchandise to check on reviews and pricing. You’ll prepare a shortlist of your favourite shops and make an effort to visit to check size, fit, construction, durability and after-sales service. You’ll probably also do comparisons to get the best price.
But more importantly, throughout the process, you’ll be allowing for your level of ski experience and the difficulty of your planned ski runs on the holiday, so as to tailor your purchase accordingly.
My point is, you do your homework to ensure whatever boots you end up spending hard-earned dollars on are perfect, so you can look forward to a brilliant snow-zone getaway. You don’t walk into a random store and buy the first thing on display – they won’t fit and they won’t do the job when it matters most.
I’m sorry to say I’ve seen people put more effort into selecting ski-shop attire than they do choosing an investment property.
Like footwear, the best real estate investment strategies are not one-size-fits-all... and if you don’t pay attention when it comes to real estate, you’ll end up with much worse than a sore foot from an ill-fitting boot.
So, what are the most important considerations when selecting an investment strategy?
Your risk profile
When deciding on an investment strategy, it’s important to understand what sort of property investor you are – particularly your risk tolerance.
As a generalisation, you’ll fall into one of the following three investor risk profiles:
You understand the value of real estate as a mechanism for obtaining, retaining and growing your wealth, but your circumstances are such that you need a strategy which mitigates the risk of you losing money.
It could be that you’re nearing retirement age, or you’ve already stopped working to enjoy your golden years.
For this group, a low-risk strategy that focuses on cash flow is probably a preferred way to go. You’re not scraping together the gap leftover when the rent doesn’t cover the mortgage repayments. Instead, you’ve got cash in your pocket each month from your investment.
It might not deliver a truckload of capital growth, but that’s not important for you – particularly in your post-work years.
Chances are you’ve got a few real estate runs on the board and a couple of wins under your belt, so you’re ready to take the investing up a notch.
Perhaps you’re a two-income household with plenty of years left in the workforce. You’ve got minimal debts, a good personal financial philosophy, and a healthy buffer to manage a moderately higher risk approach.
You in the classic portfolio-building phase.
You’re chasing high capital growth potential, because you want to build equity, and you have the means to acquire a few holdings across a couple of locations. These deals might be in suburbs or towns that haven’t peaked but have the right fundamentals for growth. They’re not easy to spot, but when presented with the right options, you have the experience to understand why they will work as an investment.
You might like to do some cosmetic renovation to add value to a diamond in the rough. You might even consider a small project like a splitter subdivision.
They’re trickier deals with better upside potential than the low risk ventures, but you won’t be risking your future on a single deal.
You want to get serious about making maximum returns and are willing to take on much more risk in order to achieve your goals.
You’re excited about property and its potential to unlock major wealth, and you want to wade into the deep end of the pool. You feel ready.
You’ve probably got a switched-on mindset, a diligent and thorough approach to research, a stack of readily available cash, and a failsafe way to juggle your personal obligations with your burning ambition.
We’re talking about investors who might tackle a larger scale developments and renovations. Perhaps you’re interested in a knock-down, split and construct in a blue-chip address, where you buy an old house in a good street and growing suburb, demolish it and put two or three new dwellings in its place.
Maybe your ambitions are bigger than that. You might have a joint venture partner and you’re looking at a medium-density unit project. Or you’re looking at land banking, commercial or industrial real estate or perhaps buying overseas.
Before you even consider anything in this category, you’ve made sure that you’re in a good personal finance position.
More than this
Once you gain an understanding of your risk profile, it makes it easier to see how long and how much it will take to achieve your goals.
How you proceed, of course, depends entirely on your personal circumstances.
Now is the time for some fierce self-assessment. You need to do some homework on your favourite subject… you!
What motivates you to succeed financially? What’s important to you? What do you want out of life? What can you realistically expect?
Also – get into the nitty gritty of the numbers too:
- What state are your finances in? What’s coming in and going out each month?
- Is your income secure?
- Is your job secure?
- Is your industry secure?
- What stage of life are you in? How long have you got left in the workforce?
- What changes to your personal circumstances are on the horizon? Are you getting married? Are the kids off to private school soon?
- Do you have kids? Are you planning to?
- What’s your lifestyle? Can it be maintained? Do you care if it can’t?
Diving deep on these kinds of questions and overlaying the answers with a forensic look at your circumstances and resources will ensure you can define your investor profile and motivate you to move forward in the right direction.
No easy answers
As you can see, the process of choosing an investment strategy that suits you is highly complex, but entirely worth it.
Blundering into a property investment simply because it popped onto your radar is an appalling way to justify taking on so much risk and debt. Worse still is buying into an investment strategy simply because one ‘guru’ (who no doubt has a special interest) suggested you start buying according to their plan.
A well thought out strategy is essential and seeking independent advice on locations, property types and price points that meet your needs is a must.
We have the skills and experience to ensure you won’t stumble, so call us to get a bespoke scheme to make your real estate retirement dreams a reality.