Buy, hold and hope...seven myths that destroy your wealth
By Rich Harvey, CEO and Founder www.propertybuyer.com.au
You make your money when you buy….but you make more money when you pro-actively review and manage what you have bought! Some investors adopt a “set and forget” type mentality to property investing. This is a dangerous strategy as there are many things that can change over time and affect the performance of your investment. To both minimise risk and to accelerate the growth of your property portfolio it is critical that you take an active interest and involvement of each property you hold.
Let’s examine seven myths that some investors and home buyers may unconsciously believe and what you can do to improve your portfolio.
1. Property prices will always rise
As an investor or home buyer it’s important to remember that the value of property does not always rise. The key drivers for property prices including buyer sentiment, the availability of credit, employment rates, interest rates and broader economic conditions, have a significant impact on what your property might sell for at auction next weekend! While trying to pick the best time to invest is a clever way to make money, what you buy is even more important. This is because good quality properties will always trade at a premium – even in down markets.
I would rather have a high quality property in my portfolio that I know will be in demand (ie saleable during any market conditions) than have a bargain property that can only be sold during a rising market. So the tip here is…understand that property prices (and rents) do fluctuate and don’t panic when they correct. Focus on buying top quality properties in suburbs that have history of growth and the right elements for future demand! And use investment strategies that don’t rely solely on capital growth.
2. Negative gearing is dead
Negative gearing for its own sake is not a smart strategy. Negative gearing is where the loss made from a property investment is off-set against an investors’ income. However, where negative gearing is a by-product of choosing a top quality investment property in a high growth location, it is a solid strategy that works for many investors. For negative gearing to work effectively, the rate of capital growth must exceed the holding costs of the property and you also need the cash buffer (and a high income) to cover the shortfall. It’s highly unlikely the Federal government will abolish the tax concessions on residential investment property, because they know it is far cheaper for private investors to help bridge the supply shortfall in property than to build more public housing.
There is a limit to the number of negatively geared properties you can own because eventually you run out of both tax deductions and cashflow (to fund the shortfall). The trick for investors is building a portfolio of properties that become self-sustaining with a good mix of high growth properties and positive cashflow properties.
3. My property manager is doing a good job
We often believe that no news is good news. Never assume your property manager has everything under control. In reality, things in properties do break and wear out. During the rainy summer months walls and cupboards grow mould. Hot water systems burn out and dishwashers may give up the ghost (all this and more happened to me in the last 12 months!). Your manager should be conducting regular inspections and provide you with a written report and photos at least twice a year. They should be advising you at least 3 months before the expiry of the lease if the rent should be increased. And they should provide you with a clear financial summary of rent collected and expenses paid at the end of the financial year.
4. Houses perform better than units
Some investors blindly hold to the mantra that houses appreciate faster than units due to higher land content. However, property price growth is highly correlated to “position.” Home buyers and investors alike will pay more for a property that is located close to work and lifestyle attractions. For example, the 10 acre farm at Kurrajong with the nice farm house for $1.5m is not likely to perform nearly as well as the two $750,000 terraces in the inner west close to the train line with renovation potential. Proximity to the CBD, transport nodes, employment hubs and other amenities will be the strongest factors for price growth. While land is a scarce commodity, well built apartments in sought after locations can outperform houses. This is more likely to be the norm in the future as “affordability” drives the property market. There is likely to be more demand for affordable apartments in the inner and middle ring suburbs than for houses (which may be two to three times the median price of apartments).
5. Just buy and hold and wait for growth
The market in 2012 is challenging. You can no longer just buy, hold and hope! Capital growth is no longer assured. You have to be strategic about what and where you buy. You must have a plan. With a sideways moving market you have to create the opportunities for growth and cashflow.
Three ways to make instant equity include:
- Buying below market value,
- Buying in hot spots, and
- Adding value
Buying below market value requires extensive market research and monitoring of individual properties over a sustained time period. You have to identify a motivated vendor that wants to sell quickly due to job loss, death, divorce or mortgage stress. Then comes the negotiation phase, knowing recent comparable sales, completing due diligence and exchanging quickly.
Buying in hot spots is another way to tap into the growth vein. Did you know there’s over 15,000 suburbs Australia-wide and 650 suburbs in the Greater Sydney area alone? It’s easy to get “options anxiety” when doing research. Don’t rely on desktop research alone – you have to wear out some shoe leather to ground truth your findings. Finding high capital growth and positive cashflow is getting harder. Here are my quick tips on how to find hotspots:
Look for PIE areas (Population, Infrastructure, Employment). Buy in areas with:
- Rising population
- Expanding infrastructure and
- Diverse employment opportunities
The other trick to create equity is to buy properties and add value via a renovation, subdivision or adding a granny flat. By adding value you create instant equity that you can then use to fund more investment activity or create a cash buffer for any shortfalls.
6. The banks are on my side
Banks are there to make profits for shareholders……not to pay off your home loan earlier. Honeymoon rates are just the marketing plug so you’ll take up their loan offering. Be fully aware of the fees and charges that the banks are proposing. Don’t just focus on the interest rate for a loan – look at the features and flexibility of the loan. It’s critical to have a sound financial strategy around your investment purchase. My tip is to get a savvy mortgage broker on your side- they know what it takes to get your loan application approved, and should have sophisticated software to work out which loan suits your personal situation. They can compare loan products and maximize your borrowing capacity at lowest cost. We are happy to recommend the top finance brokers around. The other tip is to regularly compare your rates and don’t be afraid to refinance to get a better deal.
7. Doing things myself (DIY) is best
The smart investor has usually worked out the power of leverage in using other peoples skills, time and energy. While you can theoretically do everything yourself, it doesn’t make financial sense. You can multiply your time by tapping into a network of professionals that can do things much more efficiently than you. My tip here is to get the right team of people to help you strategise, research, appraise and negotiate. You’ll need experts in finance, legals, property management, depreciation, tax accounting, structures, building inspections, renovations, and more. Please contact us if you want a referral to reputable professionals.
Summary: Don’t just buy and hope you’ve made a good investment decision. Move from “Hope” to “Reality” in your mindset and monitor the performance of your property portfolio at least annually. There may come a time that you will have to sell the underperforming property. Take care of your portfolio now, and your portfolio will take care of you when you’re older!