There is some prep work you need to do to ensure that your first foray will set you up strongly so you can continue to grow your portfolio.
1. Know why you’re investing in property
Get clear about your reasons for choosing to invest in property instead of other asset classes such as shares.
Most investors know why they want to invest in property but some do it for the wrong reasons, such as trying to keep up with their neighbours or friends who are investing.
Property investing is not a competition. To buy an investment property just to trump a friend or have something to brag about is not wise.
2. Understand the risks of investing in property
Just because prices have been growing consistently for a number of years doesn’t mean they’ll go on indefinitely.
The truth is, growth in value is rarely consistent and linear. Some years you get growth spurts. Other times it’s stuck in the mud. In short, capital growth is hard to predict.
You could also face vacancies or tenants that default and destroy your property. While there are ways to reduce these risks, they remain a part of investing in property.
If the area is in high demand, discounts are virtually non-existent as vendors know they could get the price they want.
3. Be prepared to stick it out over the long term
Even if you bought in the right area and picked the right property, there’s no guarantee that you’d see growth quickly.
While some areas may experience rare short-term surges, the majority of suburbs go through periods of slow to no growth before values rise.
Therefore, be prepared to hold your property for at least one cycle (around 7 years) if you want to make a solid gain.
This means ensuring you have a solid cash flow to maintain your property to avoid selling prematurely.
4. Learn everything you can
While you’re building your deposit, learn everything you can about property investing. Buy a few books from a range of authors to get a variety of opinions. Once you start hearing the same things over and over, you know you’re ready.
“Be cautious of expensive courses with ‘high hope’ marketing tactics,” warns Jeremy Sheppard, creator of DSRdata.com.au. “Whatever you can learn in a weekend course is not worth thousands of dollars.”
5. Get your finances sorted ASAP
Create a budget so you live well within your means. However, make sure your investment doesn’t stretch you too far.
“Remember that property investing is a long-term game. Don’t plan to tough it out for the first year, because that first year might stretch out to five,” says Sheppard.
6. Start with buy and hold
Capital growth is the ant’s pants of property investing. It’s also the easiest strategy if you know what to look for.
“Start off with this basic strategy,” advises Sheppard. “Once you can nail this, you may never need any other strategy. But even if you stretch into others, they’ll all benefit from having underlying growth.”
7. Identify vested interests
The most noise in the property investment industry comes from people trying to sell you something.
Not all of them are sinister. You’ll find plenty of well-meaning individuals who are simply badly mistaken.
Each council website is different, but most will have a page where you can view development applications.
“You won’t know who to believe sometimes. But if you can recognise when someone has something to gain by the conclusions they can get you to draw, then that’s a good start to protecting yourself,” says Sheppard.
8. Buy the best property country-wide
Plan to buy outside your own backyard. Plan to jump on a plane one weekend and go wherever the best property market is that fits your budget.
“You must learn how to read a property market from its supply and demand qualities, not from your past experience with the neighbourhood,” says Sheppard.
9. Buy existing properties
As a general rule, don’t buy new. New properties come at a premium and like driving a car out of the showroom, can drop in value soon after purchase.
10. Target character houses
If you can get an old period or character house, they usually make great long-term investments. But make sure it is in good condition.
11. Get close to the CBD
The closer to the CBD, the more convenient the property will be for tenants. Proximity to amenities that cities provide is a huge demand drawcard.
12. Development potential
Aim for a decent block of land that at least allows for a duplex to be built at some point in the distant future. A 300 square metre block is way too small – look for 550 square metres or more.
13. Get your head around supply and demand
Prices rise when demand exceeds supply. You want the highest demand to supply ratio (DSR). Sheppard points out that all your research for growth markets should be based on this philosophy. All your interpretation of data should be aimed at gauging supply and demand.
The bottom line
If you start early enough, you can make a number of mistakes and still end up not needing a pension at retirement age. That’s the magical thing about compound growth.
“Property investing is one of the surest ways to set yourself up for early retirement. You’ll never be a billionaire, but you only need to be a millionaire anyway,” says Sheppard.
Source: Nila Sweeney
Managing Editor of Property Market Insider and a former editor of Your Investment Property Magazine.