There are a multitude of important considerations in
making an appropriate investment decision
A qualified Property Investment Advisor will work to provide advice tailored specifically for you.
Your circumstances needs and preferences should be the basis on which any strategies are formulated, and recommendations presented.
Firstly, to know you and your needs, the Advisor will need to analyse many important considerations and criteria specific to you and your situation – importantly, the information needs to be both qualitative and quantitative.
A FACT FIND should be completed to determine for the investor:
Once the situation, needs and preferences are clear, the Advisor is then able to formulate a strategy and property recommendations that fit the ‘brief’ that has been identified in consultation with the investor.
Some of the critical considerations in selecting properties for review include:
Investment advice is about knowing the client, their needs and taking into account all the critical criteria and parameters to formulate an appropriate strategy and to present a well researched shortlist of property options.
The golden rule of investment is
“never put all your eggs in one basket”
Remember that profit is the return to risk – no investment is totally risk-free. Therefore we need to make investment choices that align with our situation, goals, time horizon and preferences and importantly, our tolerance for risk.
Diversification is essentially a risk management tool.
Having all your ‘eggs in one basket’ whether that is all in shares or all in property leaves you open to the possibility that should there be a downturn in either market, you will suffer a loss across your entire portfolio.
Diversification increases your chances of maximizing gains and minimizing losses.
Having a diverse portfolio increases your chances of smoothing out the variations around the growth trend line and makes you less exposed to single economic events. For example, if you have all your money invested in mining shares and China’s economy slows, your share prices may fall as large mining companies lose orders. While demand fluctuates over time and is to be expected, the impact may be more significant if it happens at a time when you want to divest and collect the anticipated benefits. (retirement perhaps)
Psychology and the media play a role too. If panic sets in and lots of people sell, thinking prices will go even lower; a raging ‘bear’ market may become a devastating reality! Having a diverse mix of shares may allow you to wait for the sliding ones to recover before cashing in.
The same applies to a property portfolio; again, diversity is wise. It means not necessarily buying in your ‘backyard’ just because it is familiar – Australia is a big place and the ‘Property Market’ is a misnomer. Some states, or locations within those states, can be stalling while others are shifting into a higher gear. That’s why it’s important to choose based on facts and figures and not on what the crowd is doing.
Looking beyond familiar territory and considering other locations can mean taking advantage of demographic changes in one part of the country, or exogenous factors like a recovery in China’s demand for our resources, stimulating jobs growth in another. Depending on your strategy, the relative affordability and rent yield of one location compared to another may be a determinant of the area chosen.
Demand for different types of housing is also a factor to consider. There is no one perfect investment property type. It very much depends on your circumstances, budget, time frames, tax position and also on the features of the property and how it matches the demographics and demand in the area.
Remember the section on Asset Classes – some are defensive, like cash and term deposits. These are low risk but low return and all about preserving capital which becomes increasingly important as the investor approaches retirement as you have limited time to recover from any erosion of your wealth.
Growth assets, like shares and property, carry higher risk but also the possibility of higher reward.
Property investment is a relatively stable, long term growth strategy. It is not a ‘get rich quick scheme’, so it’s important to buy based on facts and not emotion and to do so sustainably – don’t over commit.
The world is indebted to Albert Einstein for his formulation of a simple, but brilliant algebraic equation that encapsulates the relationship between energy and mass.
But he also had some useful day to day advice!
If you want to determine your future income and wealth, you need to be proactive now and invest in building your productive capacity, creating a larger pie and raise the level in your own circular flow!
It’s not rocket science!
Investing comes in many forms, but it always involves making a choice and prioritising and ‘delaying gratification’.
It may be as simple as buying a book about efficient organisation which may deliver benefits within days.
Or, it may be a longer-term plan, like being a poor student studying for a degree for years while only working part-time or undertaking further qualifications while working full time and missing out on lots of family time now.
Or, it may involve putting some money aside (saving) and investing in shares or property.
The first strategy increases your earning capacity. The second diversifies and adds to your income stream (rent, interest & dividends) but also adds to your wealth (stock of assets) through capital gain over the longer term.
Wealth accumulation is the result of capital gain over time by investing in growth assets.
If the investment in earning capacity is directed to more wealth accumulation over time, it serves both objectives. Once again, the decision to save and not to ‘live to your income’ is a deliberate decision and choice.
A simplified example of building a business for the future is shown below:
Assume you desire a passive income of $2000 per week in retirement
- Acquire a property portfolio of $2,000,000
- Long term hold – allow for movements around the trend
- DOUBLES to $4,000,000 (based on historical averages)
- SELL DOWN half to pay the debt
$2,000,000 at 5.2% rent yield = $2000pw!*
(* costs of ownership need to be allowed for)
That’s the theory!
What it relies on is the capital growth component but
Capital growth CANNOT be guaranteed.
Capital growth predictions can only be made on the balance of evidence.
All that can be offered in all honesty is ‘Above Average Opportunities’
Ethical, compliant, and educated professionals should not and cannot offer you certainty and should be open about the fact.
Be guided by those who are honest and transparent about the assumptions on which they are basing their advice.
“The time is ALWAYS right
to do what is right”
Martin Luther King