Investing in real estate has the potential to be one of the most lucrative means of growing your assets, but it’s also one of the riskiest ways to invest your money. For every successful property investor, dozens went bankrupt or lost their shirt after just one investment went wrong. To ensure you can follow in the footsteps of the former and avoid the latter, you need to abide by these 10 rules for successful property investing.
The long-term is of prime importance
research has shown that putting off consumption in the short term leads to a better financial situation, as well as a better lifestyle in general.
Warren Buffet said it well when he stated “Wealth is the transfer of money from the impatient to the patient.”
While some investors believe that market timing is paramount to property investing, if you own an excellent asset for the long term, the timing of the market becomes less important.
Invest money instead of just gambling it away
The truth is many people who buy real estate as an investment are speculating and not investing at all.
Unfortunately, they don’t recognize that this is an issue.
Simply put, investment always comes with some level of risk but I as an investor need to reduce that risk as much as possible.
Therefore, most people buying property are emotional buyers. They buy it close to where they live, or where they often holiday, or where they want to retire.
It is then hoped that the market will appreciate it.
It is also common for people to look for the next hot spot, trying to time the market.
They are both dependent on external market conditions to generate a profit.
Investing smartly means doing things differently.
Research, evidence, and fundamentals guide their investment decisions.
As a result, they buy properties below their intrinsic value, in areas with above-average long-term capital growth because of the affluent demographic, and add value through renovations, thereby “manufacturing” additional capital growth.
The property is the subject
Clever investors will never neglect the age-old investing rule of purchasing the high-quality property that can be afforded in desirable areas.
They refuse to be side-tracked by promising finance and tax opportunities.
Meanwhile, those investors who are lured by incentives like rent guarantees, tax advantages, and speculative profits off-the-plan, one-offs, are likely to be on the wrong side of the curve over the next few years.
Investing in property is a low-yielding investment with high growth
Capital growth or cash flow investing will rage forever, but sophisticated investors realize the only way to eventually become financially free through the property is to build a substantial asset base.
Capital growth (having a substantial asset base) is the only way out of the rate race, and it is necessary as a means of paying the mortgage.
When you’re savvy and doing your due diligence, you’ll recognize that the investment journey progresses in 3 stages.
- The asset growth stage – that’s why they need to own properties that grow at wealth-producing rates of return.
- The transition stage – lowering the loan-to-value ratio slowly.
- The stage when they live off their cash machine – a portfolio of sound investment-grade properties
The value of land increases
Savvy investors buy properties with high land-to-asset ratios.
What that means is a place where the land is the bulk of the property’s value.
Although land indeed appreciates, it’s not as simple as that.
The land is not created equal, nor does it appreciate equally.
A lot of lands (ample supply) is available in the outer suburbs of our cities, but first-home buyers make up most of the demand there.
In these areas, capital growth is muted, which makes investing difficult.
In addition, the land-to-asset ratio is typically low, with land contributing less than half of the property’s total value.
Inner suburbs, however, tend to have very high proportions of land value in their home prices.
Our inner suburbs are seeing strong demand from a wide range of owner-occupiers due to the scarcity of land.
Many of us are opting to trade space for place and choose to live close to our workplaces in places with better access to infrastructures like public transit and shopping.
Investing in the middle ring suburbs of our capital is a good long-term investment, as demand in these areas appears to outpace supply for many years to come.
Invest in properties that will be in high demand for a long time
Some properties in a given suburb will not make good investments or offer similar capital gains.
As the vast majority of buyers are owner-occupiers, investment-grade properties are most likely to appeal to investors.
It is because of this that they avoid studio apartments, student apartments, vacation rentals, and serviced apartments.
It is owner-occupiers, not renters or investors, that contribute to increases in housing prices over the long term.
In light of the changes happening to investors in the market, this will be especially important shortly as the percentage of market investors is going to shrink.
The key lies in the demographics
Many short-term factors shape our property market, but what matters, in the long run, is how many of us there are, where we live, and how much we can afford to live.
There are many more one and two-person households today.
We are getting married later, more often divorced, and living longer.
Moreover, a lot of immigrants coming to Australia are happy living in apartments.
Our taste in apartments is becoming more modern. As an alternative to having our backyards, many of us are opting for medium-density apartments with yards and entrances from inside the building.
Team up with great people
It doesn’t take the smartest person in your team to do the job.
A successful investor works with a team of consultants to discern the advisor – one who is independent of salespersons – from those who aren’t.
Indeed, they’re prepared to pay for guidance acknowledging that if they have free advice, they will be the product.
Know where the real risks are
As a general rule, investors believe that risk and reward are directly related – the greater the reward, the greater the risk.
There’s a problem with that, though.
Even though most investors believe that the biggest risk lies with the property, the markets, or outside factors out of their control, the biggest investment risk lies with the investor – their knowledge, their experience, and their mindset.
Defense is best served by the offense.
To make their investment journey as safe as a house, wise investors educate themselves and develop financial fluency.
Diversification is not a strategy used by most successful investors.
Specialists gain great results by becoming experts in one area or niche.
Real estate moves in cycles
During a boom, everyone is optimistic and expects the good times to last forever, but during a downturn, we lose our confidence.
It’s not just our market that is cyclical. A boom usually results in a recession, and vice versa.
It is right now doing the same thing it did a minute ago.