More time spent planning holidays than on property investments
Writing exclusively for API Magazine, Damian Collins, Managing Director of Momentum Wealth, looks at why property investing without a plan is a recipe for failure.
Australians are known for two great passions – a love of property and a love of travel.
The irony is that before we head off on a long journey, we typically plan ahead by working out the costs, drawing up a spending budget and mapping out what we will see and do. It makes the experience more enjoyable and less stressful.
Yet when it comes to our property journey, I am continually surprised at how many people jump into the market without any sort of plan to follow.
This was shown in our 2023 Property Sentiment Survey at Momentum Wealth, which found almost half property investors do not have a strategy or plan in place.
Long-term plan is key to investment success
The idea of “I’ll buy a property and it’ll be all good” may work out. But a try and hope for the best approach can also set investors up for failure.
I have seen first-hand how this can happen, particularly when it comes to more capital-intensive strategies.
An as example, investors often get excited by the idea of developing a property. Of course, there are good reasons for this – a well-planned development can be an outstanding investment.
However, this strategy certainly isn’t suited to everyone, and could have significant financial implications for those without the right risk appetite.
Let’s say an investor purchases an older property with plans to redevelop in a few years. In the meantime, they rent it out. Because the property is old and rundown, the repair bills are high. At the same time, there is no point investing too much into the renovation because at some point, the property is going to be knocked down and rebuilt. As a result, the property commands a much lower rent.
The whole scenario can leave investors struggling with their cashflow; and, for someone who doesn’t have the right contingencies in place, potentially in a position where they can’t develop the property at all and are left with an underperforming asset.
A good strategy begins with self-assessment
The reality is that property is not cheap to transact. You can expect to pay 5-7 per cent in transaction costs to get into the market, and about 2-4 per cent on the way out. These costs make it essential to have a strategy in place to ensure the investment is smooth sailing. And a good strategy starts with self-assessment.
This means knowing where you want to get to, and the goals you are working towards – both of which are crucial factors in determining the types of properties you should be targeting.
In addition, you also need to plan out your cashflow to ensure you don’t overextend yourself. This includes allowing for contingencies such as periods of vacancy or unexpected repairs, bearing in mind potential future life changes such as starting a family.
Importantly, be honest with yourself about the level of risk you are prepared to take on. This especially applies if you are considering a higher-risk investment like a redevelopment project.
Multi-property investors typically follow a plan
Setting clear long-term goals helps us stay focused on the bigger picture of our property journeys rather than making knee-jerk decisions in response to short-term issues.
Having a plan in place is particularly useful for first-time investors, as that initial property is often the launch pad off which you will grow your property portfolio. More seasoned investors also benefit from having a clear strategy to ensure they are on track with their goals, which are likely to evolve over time.
If you are not convinced about the merits of having a property strategy, our survey also confirmed that investors who own multiple properties are much more likely to follow a plan than single-property investors. As a guide, four out of five survey respondents who hold two to four properties said they have a plan, a figure that rises to 100 per cent of those with 11-plus properties.
Of course, life doesn’t stand still for long, and an effective plan needs to be reviewed regularly.
It can sound like a tall order, and for many investors the support of professional experts can be the key to drafting a workable, personalised property investment strategy.
