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Have you fallen victim to one of the biggest Property Investing Mistakes without even realizing it?
Getting your strategy wrong from the outset has implications that will be felt for years to come.
Affordability isn’t a strategy, Positive Cash-flow as a global statement isn’t a strategy. Think of your strategy in terms of an onion. A well constructed strategy should have many layers, it should consider your personal, financial and lifestyle circumstances yet be flexible enough to adjust as they change over time to keep your investment journey on track.
Your strategy is the foundation upon which you build your portfolio and ultimately your wealth – so it needs to be strong from the outset – to minimize its importance by adopting a cookie cutter approach or overlooking this step entirely is the biggest Property Investing mistake an investor can make.
If you have spent any time looking at property media, you would have seen numerous experts touting a myriad of different strategies as the ‘best one’.
Positive cash flow, negative gearing, renovate for profit, subdivision, off the plan, small development and commercial – just to name a few.
Each expert will give you reasons why their chosen strategy is the best – giving you financial freedom with less stress and less risk.
So which one is the best strategy?
Wrong question. You should be asking, “Which is the best investment strategy for my circumstances and will keep my investment journey on track?”
There is no such thing as a universally “perfect” property or investment strategy. The right investment property is unique to you – just as the right strategy is unique to the investment property.
Always Consider Your Entry and Exit Strategy
Throughout the accumulation phase of your investment journey you should be open to consider a diverse mix of strategies as each purchase will be influenced by your personal circumstances, how the other properties in your portfolio are performing and the market conditions / current phase of the property cycle at the time of purchase.
Ultimately, prior to going unconditional on a contract, every property you acquire needs to have an identified purpose as to how it will contribute to the overall financial goals you are working towards.
Investors also need to be mindful of their entry and exit strategy which I consider equally important. Many investors overlook their exit strategy at the time of purchase yet my many years of experience have taught me that this is fraught with consequences – most of them costly.
I have mentored many investors whose entry strategy was based on the attractive cash-flow of a property, yet they had not projected forward enough to consider who would buy their property if the market prices / rental returns declined taking the appeal out of the market for investors. If the local population and overall economic infrastructure is not large enough and diverse enough to underpin the demand and provide an exit option, they can find themselves stuck and on the sideline, with their investment plans seriously derailed.
Does your investment strategy focus on “Income” or “If-come”
To be of the opinion that one cookie cutter approach can be applied to all property investors is fundamentally flawed yet I talk to investors every day who have fallen victim to “Property Investment Companies” and “Property Spruikers” who constantly beat the same drum as they herd all the investors into the same pen so they can punch out the same cookie cutter formula that suits the company’s business model – often at the expense of the investor.
Let me demonstrate how this looks.
Pretend it’s 2011 and there are two investors looking to purchase a property valued at $400,000.
Investor A follows the advice of positive cash flow proponents. To chase the highest returns, he would have looked towards mining towns and regional centres. His focus is purely on an “Income Strategy”
Investor B applies a negative geared / capital growth “If-come strategy” where the strategy relies on taking an upfront loss with the anticipation that growth will occur, we just don’t know when. At this time he would have looked at purchasing properties in capital cities such as Sydney and Melbourne.
Fast forward a few years and Investor A would have initially enjoyed strong positive cash-flow. However as prices and rents fell across regional Australia and in locations that relied on the resources sector, he would have found rents and values dropping so dramatically he ended up with a negatively geared property worth less than he paid.
Investor B’s capital city purchase would initially have required him to budget for out of pocket holding costs every month. He would have then seen both rents and values increase - so the property he purchased would now be hovering around neutral to positive in cash-flow while being worth up to 50 per cent more than what he paid.
In this situation, Investor B is now in a much better financial position overall.
But this example doesn’t automatically mean that investor B’s negative gearing is the strategy you should apply to your portfolio as the way a property is ultimately geared is going to be different in every circumstance and will be influenced by the property and also the investors unique circumstances.
The strategy chosen needs to be in line with the investors overall risk profile while also financially modeling potential worse case scenarios to ensure you have the financial means to support the strategy.
Investor B could only participate in the If-come strategy because he was able to afford the holding costs while waiting for capital growth to occur. While a market is identified as a capital growth market, it’s hard to predict exactly when the growth will occur. Sydney and Melbourne experienced flat growth for 10 years prior to the recent spike in growth which has occurred over the recent years.
If Investor B was earning a lower income, he may not have been able to afford the initial out of pocket costs needed to participate in the
‘If-come strategy” or may have perceived the shortfall to be a bad investment option – which is the opinion of many positive cash-flow “Income strategy” investors.
If the costs of holding an asset put you under financial strain, then you may be forced to sell before the market increases in value. With entry and exit costs, you might find yourself financially more disadvantaged than where you started.
This demonstrates the importance of always considering the exit strategy from the outset.
So which is the best strategy for you?
Everything needs to come back to what suits your needs, financial situation and goals. Your personal circumstances need to be in line with the chosen investment strategy.
If someone is pushing one strategy as ‘the best’, you need to dig a little deeper to find out what their agenda is.
Often you will find that they sell only a certain type of property and are keen to push the positives – without making you aware of the negatives.
At We Find Houses, we don’t advocate any particular strategy as “the best” one because every situation is unique. We don’t adopt or support cookie cutter strategies, as our aim is to help you find the best property for your situation.
We excel at helping you define your personalised investment strategy according to your goals and situation, and locate properties that match.
As you progress through your investment journey, your circumstances will vary inevitably change over time and as a result your strategy needs to adjust accordingly. We help you review, adjust and maintain your momentum every step of the way.
If you are new to property investing and want to get clarity around a strategy that will get you started on the right foot, or if you own properties and would like to have their performance reviewed while renewing your strategy, discover how we can help you by booking a free strategy consultation direct with certified property investment advisor Paul Wilson (or put a box to click and put in info)
Feel free to also download one of Paul’s e-Books called Why 2 out of 3 Positive Cash-flow Properties Are Not Worth Touching.
About Paul and the We Find Houses Team.
If you want to take your property investing to the next level then you are in safe hands. Paul and his team provide property investor education, coaching / mentoring, property investor finance and buyers agent services for residential and commercial investors Australia-wide. A committed nature of helping you to succeed drives the culture of Paul and his team.
About the Blogger
Paul Wilson is the founder of the We Find Houses Group, a national company providing property investor services that include property investor education, coaching and mentoring, finance and buyers agent services.
If you are seeking help to take your property investing to the next level, then you are in safe hands.
Paul has over 25 years of experience as a successful property investor and is also a qualified Property Investment Adviser.
Call now TOLL FREE 1800 600 890 to find more about how We Find Houses can help you reach your goals or to enquire about having Paul attend your next business conference or investor group function.