Designing your personal property investment strategy to reach your goals
Is your current property investment strategy working for you? Or more fundamentally, do you actually have a strategy?
If the answer to either of these is no, then it’s time to take control of your investment journey to ensure you reach your goals.
The below points are key to ensuring your strategy is tailored to your personal circumstances and desired outcomes.
1. Write down your goals. Consider what you would like property investing to achieve for you and the timeframe you want to achieve it in – but be realistic. Do you want to retire earlier, enjoy more time away, pay off your mortgage sooner or purchase a new family home?
2. Which type of property investment best suits these goals? Looking at your goals, what do you need most from your property investment? Growth, cash flow, tax relief? Do you require another form of revenue immediately to top up your salary so you can enjoy a better lifestyle, work less and retire earlier OR are you currently positioned well with cashflow and prefer a capital city investment that will slowly appreciate and provide positive cashflow over time?
While it’s certainly possible for an investment to achieve both – as many regional areas have proved over the last several years – in theory, areas with high rental yield typically have slower capital growth and vice versa.
3. Do a loan comparison and find out what you can afford. It’s wise to align yourself with a mortgage broker that specialises in investment property but arming yourself with loan product and comparison information will still be invaluable. Understanding what your loan options are and identifying the best product for your needs will empower you to secure the best deal.
When you have a clear idea of your borrowing capacity and payment plan, you can then start to identify potential investments.
4. Pick your next purchase in line with your goals. As well as the mortgage, you need to consider the additional expenses involved with holding a property as this may affect the type of properties you can afford. Additional expenses can include agent’s fees, if you expect to have the property professionally managed, maintenance, strata and insurance. A new build typically ensures minimum maintenance, while a well planned reno could deliver instant equity on an older home. Think about whether a property that requires minimal managing would suit you best or if you’re prepared to put the time and effort into a reno project.
5. Identify where to invest. This is the most challenging part. Everyone will have different opinions on where the next boom area is. My recommendation is don’t follow the masses! Do the research and find your own hotspot. The key is to pinpoint areas where demand is on the verge of outstripping supply. Don’t spend too much time analysing where the median house price is going up as this can be very deceiving. How to conduct your research is explained in more detail in one of my previous blogs here.
6. Create your shortlist of properties and run the numbers. Once you’ve identified promising areas, look at what properties are available that fit your profile and create a shortlist. You’ll then need to calculate the economics of each property weighing up the holding costs versus the rental income and projected growth. There are some excellent spreadsheet templates to be found on the web that will help you calculate and compare the costs and returns quite easily.
7. Determine how much you want to pay. The only real way to get an accurate notion of the market value of a property is to look at what other similar houses in the area have recently sold for.
Then it’s time to brush up on your negotiation skills and contact the agent!
Repeat this process for each property you buy and try to diversify the markets you’re investing in to reduce risk. And remember, professional advisors are there to support you every step of the way if you need them.
With each property the process will become easier, your knowledge more extensive and you will be one step closer to achieving your goals!
Is it a smart move to purchase a home before an investment property?
As Australians, we place a high importance on owning our own home. After a car, it is usually our next ‘big ticket’ purchase and is considered one of life’s major achievements – a symbol of a sound financial position.
But is it? Is buying a home as a your first property purchase really a smart move?
The old mantra of ‘rent money is dead money’ has been so entrenched in our culture that many of us fail to clearly assess the financial impact and consequences that can come with purchasing a home as your first property. The decision to purchase a PPOR first can weaken your financial position and servicing ability with banks, and increase your cost of living. More often than not, you will also find you have to live in an area that does not tick all your boxes due to affordability.
If you had the choice of purchasing your dream home in five years, or a lesser quality, poorly located home now – wouldn’t you wait?
A mortgage delays your wealth creation potential. Many first home buyers and beginner investors jump straight into buying a property to live in. In the vast majority of situations, it is going to cost you more to own your own home than to rent. To maximise your property investment potential, the best approach is to keep your living expenses as low as possible while you establish your investment portfolio; monthly mortgage payments on your PPOR will only hinder your borrowing capacity and slow your ability to grow a portfolio. Continue renting or live with family and resist non-essential spending while you improve your financial position.
How the living costs weigh up. An example of buying a PPOR versus renting and investing a $500,000 property in a positively geared market and continuing to rent:
- Deposit: $50,000
- Loan: $450,000
- Repayments (principal + interest, rate of 6%): $675/week
- Cost to you: $675/week
Positive investment property –
- Deposit: $100,000
- Loan: $400,000
- Rental income: $1,100/week
- Repayments (interest-only, rate of 6%): $461/week
- Profit: $639/week
- Rent a $500,000 property: $500/week
- Total profit: $139/week
All too often investors who choose to purchase a home to live in as their first property find themselves in a position where they have to wait a number of years to be able to purchase again.
While living in your own home may be tempting, the benefit of remaining in the rental market while you spend a few years developing your investment portfolio means you can fast track your portfolio growth and maximise your net worth.
A little sacrifice in the short term can mean a far better financial position and lifestyle in the long term!