With anything you do of importance in life, it is far better to understand what you need to do before you try and do it. Having a goal gives direction and purpose in life, be it a small or big goal, short-term or long-term. Property is no different.
So when you’re thinking about starting your property investment journey, there are six key things to consider:
You must first start with a goal in mind, a tangible income goal. The income figure in retirement you would like to aim toward achieving could be $40,000 or $200,000 p.a.; what matters is that the figure is right for you.
A goal of owning 10 properties like I have heard some people have is misguided and not practical at all. Once you have a goal, you will need to work backwards and knowing what you want and need in your retirement, it is easier to establish a plan of action.
2. Current situation
Once you have a goal, you need to consider your current situation. There is no point having a goal that is completely unachievable. Consider your income, assets and liabilities, your surplus income every month, your age, and your living expenses, as well as your risk appetite.
You cannot enter into property investment without these fundamentals being understood.
The next two inclusions in a plan are interchangeable. You need to know what you can borrow, but the choice of property may determine what you can borrow.
3. Finance strategy
In order to ascertain how achievable your goal is, you should engage the services of a mortgage broker, to determine your borrowing capacity. It is not just your current borrowing capacity either.
The broker needs to be a strategist, not a transactionalist. They need to work out what you can borrow next, based on reasonable assumption of the ‘what if’ you buy one type of property over another now. It is like a game of chess, or snooker, you should avoid snookering yourself by working out a viable borrowing/lending strategy.
4. Property strategy
The type of property strategies and the number of properties of each strategy in the plan will impact on location choice, and therefore future ‘goal’ outcomes.
Between four to six well-purchased properties is better than just choosing a number like 10 properties as a naive goal for the number of properties you want in your portfolio.
This is based on your borrowing capacity, how you can spread out your borrowing capacity to best make allocate your borrowing capacity, then the type of property, residential or commercial.
Whether it be established versus new property, regional versus inner city versus middle to outer metro. If residential, whether it is best to purchase a house, unit, townhouse or apartment. If commercial, consider whether it’s better to buy an office space, shop, factory or warehouse for example.
An intelligent investor realises a balance of capital growth and higher-yielding properties is important.
They want to avoid the risk of becoming a slave to cost of debt in their portfolio, so they purchase capital growth and higher-yielding properties. Only focusing on capital growth can lead to being too negatively geared, and focusing only on higher-yielding properties leads to less wealth being created.
6. Purchase and set up
You need to make sure you engage the services of the right team of people.
These include a buyer’s agent, property and pest inspector, conveyancer, quantity surveyor, accountant, mortgage broker, property manager and insurance provider. Without these things, you are more likely going to fail in implementing your plan.
All of these elements contribute to a more successful approach to property investing and to your plan being more successful and worth the paper it’s written on.
Andrew Crossley is a property investment strategist and founder of Australian Property Advisory Group.