You make your money when you buy, but you make more money when you proactively review and manage what you’ve bought. Some investors adopt a “set and forget” mentality with property. This is a dangerous strategy, as there are many things that can change over time and affect the performance of your investment.
BY RICH HARVEY
To minimise risk and accelerate the growth of your property portfolio, it’s critical that you take an active interest and involvement in each property you hold. Let’s examine seven myths that some investors and homebuyers believe, and what you can do to improve your portfolio.
1. Property prices will always rise
As an investor or homebuyer it’s important to remember that the value of property doesn’t always rise. The key drivers for property prices, including buyer sentiment, the availability of credit, employment rates, interest rates and broader economic conditions, have a significant impact on what your property might sell for at auction next weekend.
While trying to pick the best time to invest is a clever way to make money, what you buy is even more important. I would rather have a high quality property in my portfolio that I know will be in demand (i.e. saleable during any market conditions) than have a bargain property that can only be sold during a rising market.
2. Negative gearing is dead
Negative gearing for its own sake is not a smart strategy. Negative gearing is where the loss made from a property investment is offset against an investor’s income. However, where negative gearing is a by-product of choosing a top quality investment property in a high growth location, it’s a solid strategy that works for many investors.
It’s highly unlikely the Federal Government will abolish the tax concessions on residential investment property, because they know it’s far cheaper for private investors to help bridge the supply shortfall in property than to build more public housing.
There’s a limit to the number of negatively geared properties you can own because eventually you run out of both tax deductions and cash flow (to fund the shortfall). The trick for investors is building a portfolio of properties that become self-sustaining with a good mix of high growth properties and positive cash flow properties.
3. My property manager is doing a good job
We often believe that no news is good news. Never assume your property manager has everything under control. In reality, things in properties do break and wear out. During the rainy summer months, walls and cupboards grow mould. Hot water systems burn out and dishwashers may give up the ghost (all this and more happened to me in the past 12 months!).
Your manager should be conducting regular inspections and provide you with a written report and photos at least twice a year. They should be advising you at least three months before the expiry of the lease if the rent should be increased.
4. Houses perform better than units
Some investors blindly hold the mantra that houses appreciate faster than units due to higher land content. However, property price growth is highly correlated to “position”. Homebuyers and investors alike will pay more for a property that’s located close to work and lifestyle attractions. For example, the 10-acre farm at Kurrajong with the nice farmhouse for $1.5 million isn’t likely to perform nearly as well as the two $750,000 terraces in the inner west close to the train line with renovation potential.
Proximity to the CBD, transport nodes, employment hubs and other amenities will be the strongest factors for price growth. There’s likely to be more demand for affordable apartments in the inner and middle ring suburbs than for houses (which may be two to three times the median price of apartments).
5. Just buy and hold and wait for growth
The market in 2012 is challenging. You can no longer buy, hold and hope!
Capital growth is not assured. You have to be strategic about what and where you buy. You must have a plan.
Three ways to make instant equity include:
1. Buying below market value.
2. Buying in hotspots.
3. Adding value.
Buying below market value requires extensive market research and monitoring of individual properties over a sustained time period. You have to identify a motivated vendor that wants to sell quickly. Then comes the negotiation phase, knowing recent comparable sales, completing due diligence and exchanging quickly.
Buying in hotspots is another way to tap into the growth vein. Did you know there are more than 15,000 suburbs Australia-wide and 650 suburbs in the Greater Sydney area alone? It’s easy to get “options anxiety” when doing research. Look for PIE areas (population, infrastructure, employment).
The other trick to create equity is to buy properties and add value via a renovation, subdivision or adding a granny flat. By adding value you create instant equity that you can then use to fund more investment activity or create a buffer for any shortfalls.
6. The banks are on my side
Banks are there to make profits for shareholders – not to pay off your home loan earlier. Honeymoon rates are just the marketing plug so you’ll take up their loan offering. Be fully aware of the fees and charges that the banks are proposing.
7. Doing things myself (DIY) is best
While you can theoretically do everything yourself, it doesn’t make financial sense. You can multiply your time by tapping into a network of professionals that can do things much more efficiently than you.
In summary, don’t just buy and hope you’ve made a good investment decision.
There may come a time that you’ll have to sell the underperforming property. Take care of your portfolio now, and your portfolio will take care of you when you’re older!
Rich Harvey is the founder and managing director of propertybuyer – Sydney and Australia’s leading buyers agents. Rich was awarded the 2011 Best Property Finder, and has received 20 other industry awards.