Property investing can seem daunting for a new investor. But it really comes down to 3 property investment must-knows: facts, figures, and mindset. Understand these to give you the confidence boost you need to get started on your property journey.
The must-knows about property investing
The first two are normally easy for people to understand – if explained correctly and without bias.
However the third (mindset) is the challenge: because we’ve all been brought up with different views, values and expectations. We get influenced by different things.
Let’s break these 3 areas down…
Supply and demand is what causes property values to go up or down.
Basic economics tells us that if there is sustainable population growth in an area that has limited land and limited properties there is a strong probability that values will go up.
If population growth falls and/or there is an abundance of available land or properties, values will most likely be slow to rise. Or even decrease.
So you need to know the facts of what is happening in the area that you wish to invest:
- What is attracting people to live there?
- Does it have all the amenities needed to keep them there?
- What investment is being made by the government and private enterprise to improve and evolve the area?
History has shown us that most areas will go through cycles of price rise, fall, stabilisation and then rise again.
It pays to understand where the area you are investigating is on the property cycle.
Ideally the best time to purchase in an area is before a price-rise – however this is not always easy to determine.
Just make sure you avoid buying in areas that have had a great deal of growth. It’s just a matter of time before the next phase will begin.
You need to know your figures and how your household budget will be affected with the purchase of an investment property:
- Know your borrowing capacity
- Run an investment analysis
- Work out the impact of interest rates.
Know your borrowing capacity
Firstly find out what your borrowing capacity is, which is based on your income and expenditure, assets and liabilities. A good mortgage broker can do this for you.
Once you know this figure you can work downwards to an amount that you are comfortable with.
This will ultimately determine which market you will be investing in and the type of property you can afford within that area.
It is ideal if you can invest within the median property price of that area – this is the price belt that the greatest number of the local population are renting and buying.
This is important both now for attracting the largest pool of tenants and in the future when it is time to sell.
Run an investment analysis
Once you have decided on a property of interest, run an investment analysis. This will help you work out if the investment will be cashflow positive, neutral or negative by considering:
- All ongoing expenses
- Tax advantages.
You need to be happy with the outcome of your investment analysis before going through with a purchase. There’s powerful software on the market that can provide a high level of information and accurate forecasting.
Know the impact of interest rates
Interest rates can also have an effect on property values.
This normally occurs on a macro (national) scale as all homeowners with mortgages are influenced.
When interest rates are low (as they currently are): people tend to purchase higher value properties for them to live in. And it is also a lot more attractive financially for investors to purchase more investment properties.
Both of these scenarios create a ‘sellers’ market which usually leads to an increase in prices.
When interest rates are higher: people become more limited in what they can afford. This can lead to a ‘buyers’ market – and often a correction (a levelling or fall in prices).
Just be aware of this and don’t over-extend so that you are forced into having to sell when interest rates rise.
It is very easy to let emotions get in the way of making a smart investment decision.
Dangerous investor mistakes
Too often first time investors feel more comfortable buying in areas ‘they know well’, such as the same suburb or city they have grown up in and lived all their lives.
This can be financially dangerous if that area is at the top of its property cycle.
Australia is a great country to invest in property as there are always markets at different stages of the property cycle. This is where your mindset has to shift from what it feels and focus on the facts and figures.
Stick to the facts and figures
Approach property investment as if you were to buy shares in a company.
It would be silly to invest in a business that rents videos just because you like watching movies and they have a store close by.
If you looked closely at the facts and figures you would realise this is a slowing industry. It would be far wiser to invest in an online video streaming business as this is an industry on the rise.
You don’t need to live near your investment and drive past it every weekend. In fact that can be unnecessarily painful.
Do what the smart investors do
Employ a good property manager who will professionally look after your investment at arm’s length and without emotion.
Take out the appropriate insurances to mitigate potential risks: it costs a lot less than what most think.
There are a lot of things to consider when purchasing an investment property, however if you surround yourself with a good team you can make it a much more pleasant and rewarding experience.
Find yourself a good property advisor, mortgage broker, property solicitor, accountant, quantity surveyor, property manager and financial planner (especially if you intend to purchase within a self-managed super fund).
It can be difficult to find a good network of people to help: but this is vital to your success as a property investor.
- Property investing can be broken down into 3 areas: Facts, figures, and mindset
- Supply and demand is what causes property values to go up and down
- Know the facts of the area you want to invest in
- Buy in growth areas
- Understand where the area is on the property cycle
- Identify your borrowing capacity
- Run an investment analysis
- Avoid letting emotion and comfort affect your investment decisions.
Successful property investing is a formula. Follow the formula and give yourself the best opportunity of achieving your goals.