If I were to give my 25-year-old self some advice about property investing, this is what I would say...
Blogger: Tyron Hyde, director, Washington Brown
When it comes to property investing I believe there are 9 key rules or “golden nuggets”, as I like to call them.
1. Pay the right price
This sounds simple – but in my opinion it’s not given enough consideration. The most successful property developers I know all say “you make your money when you buy the land”. That’s akin to saying “you make your money at the start of the project – by paying the right price”. This principle should apply to everyday property investors as well.
How many property investors know the complete sales history of all the units in a block of apartments before they buy the unit in that block? It’s pretty easy to find out these days – and you’re mad not to. Websites like RP Data give you comparables that were once only available to valuers, now they can be accessed for anyone, at a fairly reasonable price. So knowing the worth or comparable value is key.
Being ahead of the game in terms of future infrastructure can certainly put you ahead of the curve. There are many websites these days that focus on finding you the next area slated for public transport investment or increase in data speeds via the NBN etc.
3. Add value
Buying a property where you can add value has always been a pretty safe bet. Again, it’s a simple tip, but some of the best returns I see are clients who do a simple makeover to a property. New kitchen, new blinds, new carpet, new appliances and bingo – after spending $25,000 their property has gone up $50,000 in value and the rent has increased to boot.
4. Do the opposite of everyone else
Now this is not a simple tip, but stay with me. I personally get nervous when all my friends (whom I haven’t heard from for 10 years) start ringing me up and asking me for property advice. It’s a sign the market is heating up. Remember things can turn quickly and try to remain independent.
5. Follow the leader
Now I know I’m about to contradict what I just said, but sometimes it pays to follow the leader – especially if they’re a knowledgeable one you respect with a proven track record.
From a property point of view if I followed the lead of some of the wealthiest and most successful property developers I know and bought in the areas they developed early on, I’d be far wealthier today.
6. Have a strategy
Have someone look at your current financial situation and your goals and work together to ensure a sound strategy is in place.You need to work out what the best structure to buy this property in is and why? Depending on the phase of your life, it may be that a self-managed super fund is the best way to purchase a property while in other circumstances it could be that owning a property personally will be of more benefit.
The decision-making should also consider land tax, negative gearing and capital gains tax (CGT) implications. I can’t stress the importance of this. Once you buy a property in a certain entity it’s pretty hard to change without ramifications/significant costs.
7. Do the numbers
You should have a good understanding of the financial impact of any property transaction before you enter into it. Do you know how stamp duty is treated in tax terms on your investment property? How does claiming depreciation affect your capital gains tax when you sell it? How are the selling fees treated for CGT purposes?
These are tricky questions but you need to know the answers before buying an investment property.
8. Don’t believe the hype
Property doesn’t always go up. That’s one of most often touted lies. Sure – if you’re not forced to sell in a downturn, then you can always hang on and claw your way back, but that isn’t the case for everyone.
The banks will lend you more on an off-the-plan property investment but if you can get into a property with a five per cent deposit remember that all it takes is for that property to go up five per cent for you to double your money BUT if it goes down by five per cent you’ve already lost your equity.
This excludes all exit and entry costs – which would make the situation worse. Sadly, this is where most investors don’t do the math.
9. Buy the land free
I review thousands and thousands of purchases every year and when I see a client buying a property at close to or below the original construction cost – I smile.
And it does happen. Post-GFC we released many reports where the original construction cost exceeded the purchase price paid by our client.
If you ask me – it’s very hard to lose money in property when you get the land free. Yes it may take a while for that property or area to grow again. But eventually it will.