It’s difficult to create a property portfolio if you don’t know your objectives. Unless you have a clear goal and a strategy to achieve it, you won’t know what to buy and where to buy it.
Some investors are clear on their goals in property investment: they want to create a portfolio of positive-cash-flow investments which will fund their future years and help the kids as they grow towards adulthood.
They want properties where the income is sufficient to cover the costs of ownership. And they want them to be in locations that have identifiable drivers of capital growth.
Both are achievable if you know what to look for. But many people approach property investment without first sorting out this most fundamental issue: what am I trying to achieve?
If you don’t know the answer to this question, it’s difficult to know what you want to buy and where you want to buy it.
You must …
- Have a goal.
- Have a plan for reaching that goal. Understand your risk profile.
- Know you borrowing capital.
- Be willing to do some work.
- Know where to access good information.
- Know who to believe and who not to believe.
- Have a strong constitution and the resolve to persist.
Equally as important as having a clear goal and strategy is having a goal and strategy based on quality information.
Here are a series of scenarios based on real people.
They describe a variety of situations with prospective investors.
Carol and Kevin are 40-ish and own their home with a mortgage. They’re concerned about their retirement and have absorbed media messages about our aging population and the idea that in future the nation won’t be able to fund a rising number of retirees with pensions. They know nothing about shares but think they understand real estate quite well. What they don’t know is how to achieve their goal of a secure retirement. They don’t know their borrowing capacity or their risk profile. They don’t know how much income they will need to generate from investments to live comfortably in retirement.
Therefore they don’t know how many properties they will need or what kind of properties to buy. They have not put anything down on paper or spent any time with a calculator. Until they start to sort out their priorities, they will struggle to develop a coherent investment strategy.
Ken is a 23-year-old professional in IT, earning $80,000. He has purchased a one-bedroom unit in near-city Melbourne as his principle place of residence. His plan is to retire young and he has determined that property investment is his ticket. He wants to build a portfolio steadily by buying on average one property a year and by the age of 35 own 12 investment properties.
Also he does not want to be negatively geared because owning multiple properties that each cost him money will drain his income and also hamper his ability to get loans. He is willing to take on some risk but wants a balance of medium-risk properties and low-risk – and he wants them all be positive cashflow or at least cashflow neutral.
Now he has a clear picture of his goals and his strategy, which is to buy and hold, using growing equity to fund future purchases. He will be seeking to buy affordable properties in regional centres or outlying city suburbs, with some properties that are higher risk, such as locations which partly or largely reliant on the resources sector.
Elizabeth is clear that she wants growth. Capital gains are her priority and she doesn’t care too much about rental returns. She has the (mistaken) belief that she can’t have both at the same time. She is quite firm about wanting to buy “quality”, which she defines as good houses in “prime” inner suburbs of capital cities.
This means that Elizabeth has a clear goal and a clear strategy – but one that is based on a series of misconceptions. This can be as dangerous as having no goals or strategies. She has developed her attitude to real estate from media messages and has done little quality research, nor has she consulted qualified people with real estate expertise.