Why do you think people stop at one investment property?
I think there’s whole raft of reasons – one of them being that they buy a property that doesn’t perform very well in terms of capital growth. That’s where people get their equity from for their second and third property.
Most people aren’t very good at saving money so they get their equity for their next purchases from the growth in their home and also their first investment property. So if you’ve got a property that’s not performing particularly well that really holds you back.
That’s one of the reasons.
I think people get a bit impatient as well. Property is not as volatile as the share market which is great – it means it doesn’t go down as much as the share market can – but also it doesn’t have that many years where it grows really, really strongly. It’s more ‘steady as she goes’. And generally most years it will grow anywhere from between about four and nine per cent. You do have your standout years, like obviously Sydney has had recently but they’re not that common.
Most people aren’t very good at saving money so they get their equity for their next purchases from the growth in their home
So people get as bit impatient and they don’t realise that it’s a long-term investment. You’ve got to hold for the long-term. Often they sell their properties in the first couple of years. I think part of that is buying ones that don’t perform quite as we’ll. They also get a bit impatient with it.
There are other things around tenants, cash flow, and repairs and maintenance. That’s just one of the costs of doing business. You’ve just got to factor that in.
People don’t factor it into their budget that they’re going to have to spend a certain amount on maintenance each year. If you factor it into a budget, and you know that you’re going to have to spend it, you won’t get so frustrated with it when it comes along.
The other thing I’ve seen is people don’t do PAYG tax variations. So they’re struggling a bit with the cash flow during the year and then they get a lump sum at the end of the year when they file their tax return. It would make their life a lot easier if they did the variation as they went rather than trying to wait to get the tax back at the end of the year
So it’s all those things. It’s buying right in the first place, just being patient and you’ve got to be willing to make a decision. Some people aren’t willing to sacrifice something.
To get that second property, your first one might still have some negative cash flow perhaps, it means your next one may also. I always say to people ‘well you’re going to have to sacrifice at some stage. It’s just a choice of sacrificing a little bit while you’re building your property wealth or sacrificing a heck of a lot when you retire and you’ve only got the pension. It's just a choice of when you’re going to make that sacrifice.’
So there a lot of the reasons why people don’t get past that first property.
When people buy their first property, should they already have a plan in place for their next purchase?
For some people it can be very quick and they can do it within six to 12 months. Other people take a bit longer.
You can’t predict exactly. Plans never come to fruition exactly as expected but at least you know on a road map when it’s likely you can get your next one.
I’m certainly of the opinion that you want to aim for ‘too many’ properties. Three would be the minimum that you’d want to aim for. If property is going to be your vehicle of choice for investment, three would be the minimum you’d want to aim for and preferably five or more.
You’re going to have to sacrifice at some stage. It’s just a choice of sacrificing a little bit while you’re building your property wealth or sacrificing a heck of a lot when you retire
What advice do you have for people thinking about getting their second property?
It has to be about equity equity.
We have some clients on savings plans – so they’re putting aside money, they’ve budgeted what they can afford, what they’re happy to live on versus their income, and they’ve got a savings plan which goes into a specific account and they save that way. The vast majority of people it’s going to be equity that’s going to get them into their next one.
That’s why it becomes so crucial to buy that next property. So if we have a client who is struggling with equity, well then the first property we need to focus on needs to be one with high growth. And yes, maybe the yield won’t be as strong.
It might be something with redevelopment potential, it might be something that can benefit from a refurbishment, so we can add value to it – but it’s got to be a high-growth property.
You’re going to get equity more quickly that way.
So it’s not necessarily a property that’s going to give them high depreciation and high rental yields, because they tend to grow at a lesser rate as a general rule.
It’s about setting the strategy in place at the beginning. Most people will have a mix of properties. It’s based on individual circumstances, their risk profile, how much debt they’re comfortable with, all those myriad of things and then map out a plan.
What are some signs a property might be set for growth then?
There’s a whole raft of things you need to look at.
On a city level we’re looking at relative affordability, economic growth, population growth in that city, current supply of properties in that city, and the industries that dominate that city – are they industries that are performing fairly solidly?
And from there you’ve got to choose the suburb. It’s really hard to try and find a property that’s going to massively grow in 12 months. You’ve got to be looking at what’s ahead in a three to five year timeframe.
You need to choose properties in areas which have got good infrastructure, good proposed infrastructure, that might benefit the area – certainly public transport, proximity to the CBD, near features that people want to be near.
It’s really hard to try and find a property that’s going to massively grow in 12 months. You’ve got to be looking at what’s ahead in a three to five year timeframe
Make sure you look at that relative affordability – so looking at areas that have got all the good fundamentals but are mispriced compared to other suburbs. There’s always that ripple effect. As one area become fashionable and popular, it will start to move to the next areas. Target those areas. What we’re trying to find is properties that get re-rated by the market, so you get that outperformance.
That all takes time, it doesn’t happen overnight.
The key message is people just have to be patient. Develop a plan. It’s not a get-rich-quick overnight thing. There’s no reason why most people out there can’t buy a reasonable amount of properties over a period of time.