If you want to generate a passive income through property, there are rules you need to follow and myths you need to move past.
Blogger: Kevin Lee, founder, Smart Property Adviser
If you're interested in property investment and looking for a short term gain, a 'get rich quick' tip or negative gearing insight, stop reading - this article is definitely not for you... However if you're serious about generating a passive income to fund your retirement someday, then grab a coffee & read on - I promise it'll be worth the six and a half minutes you invest.
1. Don't make this mistake:
One of the biggest mistakes people make is believing that any property is an investment opportunity.
With this belief firmly entrenched many "accidental" investors soon learn that when it comes to property investment, research is just as important as having the right mindset, knowledge and education.
Without these key skills, you become an easy target for the hundreds of crooks, spivs & spruikers who's only goal is to part you from your money. Before the now infamous meltdown known as the GFC, you could purchase almost any property and 'expect' to see it double in value every 7 to 10 years. Right?
Wrong! That cliche was always an 'urban myth', and RBA chairman Glenn Stevens, now agrees that property today won't deliver the same capital growth result, that was 'the expectation' of most Australians over the past forty years.
2. Understand that demography drives the market.
There are some alarming structural changes and a massive demographic shift taking place right now that will affect Australian property values and our economy at large. I started talking about this shift (Australia's ageing population) and generational changes way back in 2007.
Back then people thought I was crazy. Today it's the topic of the century.
Despite our newfound 'street smarts' though, the property spruikers continue to promote the wrong types of properties in dubious locations and stitch people up by calling it "negative gearing". Correct me if I'm wrong, but I've always believed that an investment property was an asset, and assets are meant to make you money.
But as the spruikers claim: "The property market doubles every 7-10 years", "Buy negatively geared property and you'll be a millionaire" "Buy in one-horse mining towns"... I've heard it all and it still disgusts me.
Today's investor can no longer rely on luck or advice from family & friends. You need to rely on thorough research, your own judgement along with a healthy financial education.
3. Remember that positive cash-flow is king.
People often confuse cash-flow and gearing thinking they're the same thing; they're not.
Cash-flow is the pre-tax income your investment property generates week in, week out. Gearing refers to 'how' your investment property is financially structured after tax.
Negative cash-flow then, is when the expenses exceed the income that a property generates. Smart investors know that negative cash-flow properties eventually cause you financial strain which prevents an investor from growing a multi-property portfolio.
However, finding positive cash-flow properties is hard work - there's no easy way to put it. Investors must first know what they're looking for and how to compare properties and locations accordingly.
Smart investors take this one step further and put a system in place that can make the entire process easier, less time consuming and more productive. It's what they use again & again to snag positive cash-flow properties - often before you even know about them. I know because I'm one of those investors.
4. Don't fall for the BIGGEST lie in the property industry.
The biggest piece of BS that investment industry professionals perpetrate is that there's just one property market. THE Property Market? Smart property investors know there's no such thing.
Most property "gurus" talk about the property market as a whole; they won't tell you that there are as many "property markets" as there are streets in Australia. In fact there's thousands more! The same applies to every other country.
No two streets are alike in any property market: property type, surrounding amenities, infrastructure and even the type of tenant differs from street to street. These attributes affect the supply and demand equation for that particular market.
Did you not know that an eight storey block of units actually consists of 32 property markets? One for each of the eight floors x the four sides!
Most investors also don't know that there are property 'pockets' within most markets - areas in a suburb that can provide better opportunities than another area in the same suburb.
It's crucial that before you invest in residential property you understand there's no such thing as 'THE property market'. And that there are thousands of sub-markets: some are hot, some are very cold, and others are dead!
It's vital to remember that demography drives all property markets.* Australia is currently at the precipice of a massive demographic shift that will change the way people live (and what investors should buy) in the foreseeable future. *if you want to know more, get in touch, I'd be happy to share the statistics with you.
Sadly, there is no such thing as THE property market; and not all properties are a great investment opportunity! At least not for you anyway.
Remember - the person collecting your signature on that 'wonderful off-the-plan or house & land purchase contract' is most likely motivated by their potentially massive commission cheque - often upwards of $25,000.
In 2015 and beyond positive cash-flow is king; it's crucial to know how & where to find these properties if you want to invest for long term passive income.
The last word? Don't ever take advice without doing your own research. Not ever!