The strategic edge separating one-property investors from portfolio builders

Approximately 2.3 million Australians own an investment property but, of these, the majority (70 per cent) own just one.

So, I hear you ask, what separates the majority from the more successful minority?

Well, it’s the fact that most investors will tell you their criteria is about location, location, location. In other words, they are employing tactics when it comes to buying a property.

The successful minority will tell you it is about two things – growth and cash flow. These folk are employing something more than tactics; they’re utilising a strategy.

Capital growth

Let’s start with growth. It’s fundamentally important that a property grows in value to be worth more than what we pay for it.

Yes, location is one of the aspects you should consider achieving this, but there are two others which are just as, if not, more important.

Land content and timing. The minority therefore will tell you it’s about land content, timing and then, finally, location.

Land

What’s most important when it comes to property investment is choosing a block of land with a house on it, rather than units or townhouses.

The median house price has increased in Sydney by a multiple of eight over the past 36 years. Land has increased by double that rate (a multiple of 17, in fact). Most people know this, yet almost half of all property investors buy a unit or townhouse, both of which have little to no land value to offer.

The land is the part of your investment that grows in value over time. The building on the land, which you need to rent out to secure those all-important weekly rental payments, will start depreciating in value from the moment it is built.

Timing

The next most important criterion for investment is to buy at the right time of the cycle. Property markets move in cycles. The median house price roughly doubles every decade, but the majority of growth happens in a two- to four-year window.

You could have bought in Sydney in 2004 and seen just 4 per cent growth through to 2011. But, if you bought in 2012, you would have seen a whopping 63 per cent growth through to 2015.

From this you can see that getting the timing right is crucial.

Once you have all that lined up the timing is perfect. You can move ahead and buy the right investment property for your portfolio as soon as it comes up. You don’t have to invest in an area you want to live in; it doesn’t even need to be in the same city you live in.

Location

Once we have settled on the market that most suits us timing-wise, it is then a matter of location. Specifically, one that is close to good amenities, jobs and infrastructure. This will mean it has a growing population and therefore demand for housing over time.

That’s why we suggest looking at locations close to good job nodes and infrastructure like hospitals, major shopping centres, schools and universities, all of which hire hundreds of people.

It’s also important to choose somewhere that has good public transport so renters have options for travelling in and out of the area and aren’t forced to wait hours for a bus or train or rely on their car.

Cash flow

Cash flow is the second element when it comes to strategy.

Cash flow is the oxygen of investing; run out and it’s all over. The average investor sells their property before seven years (i.e. less than one full cycle) because cash flow necessitates doing so.

Cash flow requires two things; rent and tax.

Rent

Rent is obviously important, after all it is our income. The overall rent return is crucial. But it’s not as simple as the headline rent return.

You need a property that is going to be rented for 51 or 52 weeks of the year and attract little to no maintenance.

The higher the rent you need to charge, the lower the tenant pool and higher the likelihood of vacancy.

The opposite also plays. Therefore, stick to the middle of the market and ideally within 30 per cent of the average income in the area you’re investing in.

Older properties strike a blow at both ends of the spectrum – high maintenance costs and higher vacancy periods as newer properties attract higher demand.

Tax

One hundred per cent of the cost of a house is tax deductible, and a significant majority in the first 10 years. My wife and I get a tax refund of approximately $60,000 per annum on our 10 properties because of this depreciation.

If you’re not using your tax to fund the cost of holding your investments, you’re playing with one hand tied behind your back.

Building a portfolio is achievable

Yes, most people know all this stuff. But most Australian’s don’t do what they know. One in two property investors don’t own their land, nearly half of all property investors buy within a short distance of their own home, and another one in two property investors have negative cash flow.

It’s fairly simple, but it’s not easy, and it’s certainly not commonly done.

That’s the strategic difference employed by the successful minority.