The Eight Fundamentals of Property Investing

Discover the eight fundamentals to make every property in your portfolio cash flow positive!

1.      Understand emotions

The market place is made up of many different emotions. Once you let them enter your thought process while buying investment property, you spoil the deal. Avoid emotions at all costs. It’s not the colour of the fence that makes your wealth, nor how big the kitchen is or how beautiful the garden looks. What’s really important is the numbers. Your only thought should be for how much profit is in a property or how it will perform over the long term.

2.      Cash on cash returns

When buying real estate, you need to find a deposit, which usually has to come from your own savings. The deposit is essentially, your capital, and it’s never wise to invest capital unless you’re sure you will get results. The formula that’s used to measure the likely performance of your deposit is known as cash on cash return.

Cash on cash returns are the fundamental instrument to building a successful property portfolio. Seasoned investors measure cash on cash returns in 12 month increments. For example, if you were to put $30,000 in the market, accumulate the asset and achieve growth over 12 months to gain a further $30,000 then this is considered to be a 100% cash on cash return.

Never buy a property as an investment if you cannot get 100% of your capital returned within 12-18 months.

3.      Where to invest?

Location is important but it’s not the only fundamental, nor should it be the primary reason for purchase.

Not everyone can invest in premium localities, so if you’re unable to get into the blue chip zones you should use the same fundamental principles in smaller secondary markets. Then later, you can migrate your money to more premium growing locations.

Within any market there are indicators of the market’s ability to perform. Understand the market drivers, become familiar with them and you will be able to forecast which areas will grow or trough.  The drivers are:

• Population growth
• Economics
• Demographics
• Infrastructure
• Yield variation
• Supply & demand

4.      When to invest?

“After expansion comes contraction but after contraction comes expansion.”

This is a simple thought but it can have a huge impact on what you do and a massive influence on when you should buy.

80% of the market buys when the market is more than halfway through expansion, which is when I would rather sell than buy. You can make money no matter what the market is doing but investors will always make more by running counter to the cycle.

Property investors should be aiming to buy at a discount when the property market is contracting and re-value the property when the market is expanding.

5.      The commodities

To make the most out of the market you need to arm yourself with the best tools. There are commodities in the property market you should buy, much like the commodities that exist in the stock market. Understanding how to best use the properties as commodities is the key. First, though, let’s discuss what the commodities are.

The five residential commodities are:

• Discount
• Renovation
• Strata subdivision
• Subdivision
• Off-the-plan

Discount

The commodity of discounting is as old as civilisation. If a property is valued at $500,000 but only sold for $400,000 there is $100,000 in recyclable value to the buyer and $100,000 loss to the vendor. If the property were valued a year or so later and the property is now worth $475,000 the buyer has made $75,000 gain. The market didn’t provide this increase, the gain was achieved by buying well in the first place and using the commodity discount.

Cosmetic renovations

Adding value by carrying out some very simple renovations can often be done on a very small budget.

Strata titling

If you buy a property with multiple dwellings that is not yet strata titled, and if zoning allows strata title approval, this commodity can return huge profits of up to 30% or more.

Subdividing

This is a commodity that adds value. The way to do this is to buy a house with an extra big block of land and cut some off to either build another house or create another piece of land that you can sell.

Off-the-plan

Off-the-plan means entering a contract to buy a property that is not yet built. It exists because of a need to eliminate risks to those involved. We, as investors can apply this commodity to create equity by using the market and time to add value. Off-the-plan deals can give you great leverage for a small amount of money as a deposit.

6.      Patience is a virtue

An investor is like a farmer in the sense that you can only reap what you sow and you won’t see results immediately. You need patience which is a rare commodity in the modern world.

Creating a deal that, as we say in the industry “stacks up” takes endurance and commitment so don’t rush anything.

Offers, if constructed properly are not binding if the right terms and conditions are set out in advance, so consider it a sounding out process. Some terms that should always be standard in your offer document include being subject to building and pest inspection, subject to valuation and subject to finance terms suitable to you, the purchaser.

7.      Due diligence

Without the adversity that any kind of investing brings, we would never advance. Sometimes we need small failures which will allow us to succeed in the long run. It is inevitable that beginner investors, and even experienced ones will makes mistakes. The aim is to limit them as much as possible and avoid the most obvious ones. You can do this by speaking to a professional before buying property.

Due diligence costs money so don’t ever skimp on it. The few hundred dollars it costs to run due diligence can save you a lot of money in the long run.

8.      Assemble A team

Investment, if done alone can be a very tough struggle for success. Instead, surround yourself with family and friends who can support you as you move through your journey to financial success, as well as a team of professionals who can guide you as you take each step. Among the people whose services you will need are conveyancers, finance brokers, buyer’s advocates, solicitors, accountants and depreciation experts.

It’s often preferable that these specialists be personally involved in the property investing game so they can better assist you in achieving property success.
 

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