Thinking of Real Estate Investment? 7 Things Before You Head Out
Starting in the property investment industry can be a tricky path to navigate. Questions and decisions concerning property buyer agents, mortgage brokers, and apartments versus housing will quickly make it feel a bit overwhelming. Here are 7 quick tips to help you start this journey and assist you in asking the essential questions.
1. Trusting the professionals
Trust is a massive part of the property investment industry. Putting your trust in a professional is key, especially as a beginner, and will be essential in accelerating the journey.
But these days, everyone is an expert - from property buyer agents and property investment consultants to those selling on behalf of a developer or builder. While it is not necessary to use a property buyer agent or a consultant, there are a few ways to develop that trust if you choose to do so.
The first point is to ask the agent or investment consultant what they have achieved. This might include finding out their net equity or the passive income they are generating from their portfolio. If they haven't demonstrated a level of success that you aspire to, then maybe that person isn't right for you.
Next, ask them as many questions as possible and ascertain the sophistication of their answers. If their answers are vague or confusing, then that level of sophistication signals that they may not be an expert in what they do. Or perhaps they aren't beneficial. A good consultant or agent should answer your questions directly and in a way that makes sense to you.
2. Educate yourself
While a property buyer agent or investment consultant may be an option, it is essential to have a bit of background knowledge so you can know what you're after and how to get it. Educating yourself on the right strategies in property investment will alter your goals and what you had in mind. If you go to an advisor with a specific property or suburb in mind, they will do all they can to aid you in investing in that property.
While this may seem optimistic, without an informed understanding of the right property, it makes it hard for the advisor to aid you in your journey correctly.
Whether it is the right property for your portfolio or help you achieve your goals, that understanding only comes from education. Being able to ask intelligent questions means you will get thoughtful answers.
While it is important to absorb as much as possible generic knowledge, general statements and opinions will not make you an advanced property investor. Property investment courses, forums, podcasts, and property investment blogs (like this one!) are all great sources for an informed and credible education.
3. Get the correct information - Analyse accurate data
You no longer need to visit a suburb to see its capital growth potential. You don't need to get to know the streets, find the closest hospitals and schools, or do a criminal check on all the neighbours. Everything you need to know about a suburb for property investment can be found online or over the phone. All the information you need is at your fingertips, whether it is the 30-35 quantitative or qualitative data factors that should be reviewed before making a decision or calling a few top agents or the local council.
Suburb or property selection is about acquiring the correct data, knowing how to interpret that data, and how to translate that analysis into a decision point. Is this suburb going to grow in the short term? Is this suburb going to grow in a long time? While long term growth is much easier to determine, short term growth should not be a gamble either. Instead, the only variable in short term capital growth should be the extent of that growth. This means reviewing all the factors to outperform the average. It's not just about a vacancy, capital growth, yield, but also analysing actual data such as average vendor discounting, stock on markets, building approvals, online search interests, and more!
4. Apartments versus Housing
Apartments, on average, don't see as much capital growth as housing and blocks of land. Perhaps you found a new suburb with plenty of potentials, or maybe there has been a population boom in that area. However, supply remains the enemy of growth, and if supply keeps up with population growth, capital growth or prices do not increase. With apartments, you miss out on scarcity, as developers can create supply by building more, onwards and upwards. For apartment investing, the sky truly is the limit, except in the case of capital growth.
A block of land or house is what will become scarce. The science of property investing is to find a block of land where data suggests that demand is higher than supply. The land is what appreciates, while the building depreciates. Investing in apartments equals a low land to asset ratio.
And this is all before we've started talking about body corporate fees and sinking levies!
In property investment, it's important to dispel the myth that your only option is investing in apartments due to your financial situation. If this is your thinking, the first step is looking outside your backyard (see step 7).
5. Old property versus New PropertyIt is essential to consider whether you invest in a brand new property or an already established property. Often a property buyer agent or property investment company will have a long-standing relationship with a builder or developer and have a stake in selling you that brand new house and land package. They might tell you how easy it is to get tenants, even providing rental guarantees, or how the population is growing in this area. Yet, there are some essential things to consider in the 'old property versus new property' debate.
The new property will always underperform in terms of growth, as they are often in areas where there is a lot of lands and a lot of building approval. This goes back to supply, resulting in a lack of scarcity and how it can negatively hinder growth.
Claiming depreciation may also be an attractive part of investing in new property. However, much of this depreciation ends up back with the ATO. As a result, depreciation is a side benefit of property investing, not a strategy.
You might be worried about the tenant appeal of an established property or even maintenance costs. While it's true that brand new property involves lower maintenance costs, it is not financially beneficial to sacrifice capital growth to minimise these maintenance costs. As for tenant appeal, buying in an established property, in the right area, with low vacancy rates, and with the right advice means you can easily avoid significant periods of vacancy.
Investing in an established property means you can add value and make more money when selling. This is not possible with the brand new property. Adding value to selected properties is where you start to reap the benefits of property investment—that is, if you are willing to put in the work!
6. Find a good mortgage broker.
Regardless of your property investment strategy, almost all require lending from a bank or a non-bank lender. This means that it is essential to have a good mortgage broker. Simply put, this is someone that can connect you to your lender. But what are some things to look for in an investment broker?
The first might be to consider whether they are an investor themselves. Unless someone has applied theory investment and had practical experience, it might be hard to give advice and get positive outcomes.
Their experience and understanding of property investment are critical. This might mean having witnessed at least one property cycle to have a sense of risk mitigation. They should have multiple lenders who they work with, so they can find precisely the right lender and provide you with an investment strategy tailored to your needs. They also need to understand the market, which includes being in touch with lending conditions and any laws and regulations that might impact your decisions.
7. Be open-minded Many investors in starting only things to invest in their backyard. It is unlikely that the best suburb from a cash flow and capital growth perspective is within a 5 km radius of where you live. It can often be riskier to invest where you do know because you are under the misconception that you know it. And investing halfway across Australia doesn't require that much risk appetite. You can adopt multiple steps and mechanisms that limit this risk, completing proper due diligence with all the right people, all while minimising the risk that comes from limiting yourself to what you know. There are around 15,000 suburbs in Australia — be open to them all!
Still, feeling a bit overwhelmed? Got even more questions than before? “Get all your questions answered here”
Daily Bulletin
