Common Mistakes

“The trouble is, you think you have time” – Buddha.

 

 

 

Procrastination – property investment is not a ‘get rich quick scheme’. If that’s the kind of risk profile you have, then you are a speculator, not an investor. Time in the market is crucial to riding out any volatility in rent returns and values around the long term trend line. Many people take so long waiting to ‘jump on the train’ that they miss one after the other and are left back at the starting line for years. Remember the ‘miracle’ of compounding! Starting your investment journey as early as feasible allows you to reduce your risk, minimise outlays and maximise the potential returns.

 

 

Not seeking professional advice – in a highly specialised economy, it pays to leverage off the expertise of qualified, experienced professionals to support your investment decisions. This applies to seeking advice re finance structures (investment broker), legal entities, tax implications and ownership splits (accountant), estate planning and exit strategy (financial planner and accountant) and of course investment property choice, purchase and setup implementation with a property investment advisor.

 

 

Not having a plan – It’s said that ‘it’s a long time on the golf course if you don’t know where the 18th hole is’! It’s the same in life. Do you simply want to wait and see what happens or do you want to take charge and have an influence over the outcomes and options in your life and the lives of your family?

Investing allows you to identify that 18th hole and perhaps enjoy the 19th more!

 

 

Overcommitting  – because property investment is a long term strategy, it’s necessary to make it sustainable for the long term. So the investor should not (and should not be encouraged to) overcommit. Your borrowing capacity may be large, but that doesn’t mean that you should spend to your limit. Borrowing capacity doesn’t necessarily equal your ‘comfort’ range. Ideally, the property should be able to tick away in the background without a significant imposition on your budget or lifestyle. Additionally, not using up all your borrowing capacity allows you to come back and buy again too – it means having more than ‘one pot on the boil’ at a time.

 

 

 

Lack of diversification – this applies to having a mix of asset classes and within the property class, mixing up the locations, types and price points. Allied to the last point about over-commitment, is the consideration of whether it’s wise to buy one expensive property if funds allow, or two lower-priced properties? Typically two lower-priced properties is a better idea because it spreads the location and type risk, and it also increases your liquidity. Property is a relatively illiquid asset – so if you need to access some funds or divest for some reason, you don’t have to exit the market altogether but can do so in part.

 

Assuming that nothing will ever change in the future – it’s vital to ‘stress test’ your choices. Once again, because a property is a long term investment, you need to understand that there are no guarantees in life. Interest rates can go up (or down), and rents are market-determined and therefore can vary from time time, additionally, government policy and regulation, in particular, tax incentives can change and personally, your circumstances are also subject to change and may have an impact on the sustainability of your investment position. Job security, relationship status and health may all throw ‘curve balls’ into the mix over the long haul. It is a reinforcement of the recommendation to invest sustainably and for the long term so that you ride out the ups and downs in the market and life.

“The only ones to get hurt on a roller coaster are the jumpers.” Paul Harvey

 

Inadequate insurance and risk mitigation strategies – keeping in mind that ‘profit is the return to risk’, the savvy investor acknowledges the risks and takes steps to address them as adequately as possible. It starts with using credible and qualified team members in the journey and seeking advice, asking questions, stress testing, making dispassionate decisions, and having adequate insurance in place ( building, landlord’s, contents, perhaps income and life) and not over-committing.

 

Making changes to finances midstream – Lender’s ‘goal posts’ shift all the time, and typically there are many hoops to be jumped through to be approved for a loan. Once a pre-approval is granted, it is recommended not to make any changes to your financial position, such as going out an buying a new car or changing jobs, until the loan is funded. (even formal approval may not be enough to allow changes to financial behaviours). Consistency is particularly crucial for settlements that are a long way off. There is no certainty that lending criteria will remain the same in 6 or 12 months. Once again,  qualified, honest and compliant professionals in the property investment space will make you aware of this risk and help you to decide if it’s a suitable one for you to take.

 

 

Looking over the back fence – this one relates to the idea that you need to buy where you live and where you think you know. Australia is a vast country, and as we have discussed, there is no one property market, there are opportunities across states and regions, in inner, middle and outer ring suburbs in different types and style of houses. You are limiting your options and diversification by not considering the alternatives. It also pertains to the idea that if the property is close to where you live, you can look after it! That is the job of your property manager – engage professionals to do what is best done by them, keeping the emotion out of it. As your portfolio grows, there isn’t time to be doing your job and managing several properties. Property management fees are tax-deductible, a professional expense incurred in running your property investment business.

 

Unreasonable rent expectations – it’s a fact that rents are market-determined. There is no point leaving a property vacant in the hope of finding a tenant who will pay $520pw when the property manager is telling you that $500pw is the highest possible return at this point. Every week the property sits empty it costs you $500; if it is vacant for a month, then it has cost you $2000 or nearly $40pw. You are better off taking a tenant straight away, minimising vacancies and sacrificing the $20pw (or $1040pa) rather than $2000. Be pragmatic and don’t ‘shoot yourself in the foot’!

 

Recordkeeping – To make all the claims you possibly can and therefore minimise the bottom line, meticulous records must be maintained. Those who don’t have a system for recording all their property expenses will more than likely miss out on allowable deductions and cost themselves money! The ATO specifies that the property investor must keep proof of income and expenses and supply them on demand for the last five years. Typically investors use excel spreadsheets and shoeboxes of receipts and scramble at the end of the year to provide a record of the financial year to their accountant to decipher. Alternatively, ASPIRE clients have access to a Portfolio Manager to record, track and visually present their income, expenses and asset position at the click of a button.

 

Not understanding the purpose of bank valuations – Valuations are a measure of the bank’s appetite for risk, which varies over time. There is a difference between a bank valuation (done to protect the bank’s balance sheet) and market valuation. Bank valuations are inherently conservative and vary widely. It is wise to be prepared for some variation in the valuation from the contract price, anywhere between 5-7% is quite routine. Appraisals are very much an ‘inexact science’ at the best of times; they are heavily dependent on individual expertise and opinion. Forgoing an excellent opportunity that stacks up well in all other respects because of a low valuation may be shortsighted.

 

 

Thinking that the lender with the lowest interest rate is best – everyone wants the best deal possible, but the right choice is the lender who will do the deal for you! Some promise low rates but bring in valuations short of the package price, forcing you to contribute more. It’s their informal way of securing themselves. Insisting on saving .25% may save a few thousand over ten years but, if that lender is notorious for conservative valuations or restrictive criteria or is too slow and won’t allow the deal to ‘work’, as an investor you may potentially forgo capital gain for 10 years, which may result in a far higher opportunity cost. Be guided by your broker who knows who’s ‘doing the deals’

 

Not making all the claims you can – make sure you have an accountant who is up to date and thoroughly conversant with property investment tax legislation. Have a professional depreciation report prepared and claim these ‘non-cash’ deductions; they are significant in reducing your burden and are too often overlooked. Stay up to date with ATO rulings on allowable deductions.

 

 

 

 

 

 

Why the New Year is the ideal time to invest

 

 

Richard Crabb – MD ASPIRE Property Advisor Network | PIPA Board Member

There are a lot of promises we make ourselves at the start of each new year—things like spending more time with friends or getting our health and fitness plans back on track.

These are all perennial favourites, but another that seems to turn up every annum is the evergreen, “THIS is the year I’ll get my financial affairs in order.” And while all these good intentions are important, there’s no denying they become challenging as we settle back into our daily habits. It’s human nature to run to the routine.

We’ll find ourselves marching through the weeks to the beat of a familiar drum. Then, before you know it, Christmas decorations are appearing, and December is upon us once more. What happened to all those resolutions from January?

Well… this year is different because instead of dreaming about your ideal year, we’ve hit the turning of a decade which provides the perfect opportunity to ensure your future looks bright beyond the next 12 months.

In fact, 2020 is the ideal pivot point for motivating you into mapping out an amazing next 10 years in property investing.

The procrastination past

Perhaps, more than in any element of our lives, the unrealised idea of investing for our future is the most tragic missed opportunity.

The reason is the majority of successful investors gain their wealth by stealth. Incremental increases in value that don’t seem like much over short time frames – but add them together across multiple price cycles and you’ll see a monumental uptick in their financial position.

Property investment success works because the gains are consistent. This is why real estate outperforms most other investments vehicles over time.

The tragedy is that these slowly ratcheting capital increases don’t occur for most people because of one simple, but crucial, reason.

They fail to get started in the first place.

The key to success.

There are many reasons why people procrastinate themselves into an inadequate retirement.

For example, some read media reports like they’re gospel and become reactionary in their investment decisions. Anyone who had been scrutinising headlines over the past six months for Sydney would have been bracing themselves as we plummeted headlong toward the bottom of an almighty price crash.

These readers may have included potential investors who thought, ‘Now is not the time. Look at what’s happening!’

Of course, what a difference a few months can make.

As soon as interest rates fell once more and lenders loosened the reigns slightly, the market started to turn up again.

There are now plenty predicting the Sydney market has already bottomed and is due for double-digit price rises.

And those who failed to act a few months ago for fear of further value falls are now being left in the wake of tighter listing numbers and rising prices.

So, my first tip – stop reading daily property articles and believing the trend is set for decades to come.

You should be buying now to take advantage of the market in two price cycles time – or 10 to 20 years. You shouldn’t be thinking, ‘Will I live in regret in 12 months if I buy now?’. Instead think, ‘Will I live in regret in 10 years if don’t buy now?’… and the answer is, invariably, yes.

The next tip is to extend your expectations.

There are plenty of people in 2010 who thought about investing but held back because they couldn’t see a way to make gains in the first couple of years… so they waited.

Those same people will be here in 2020 having the same conversation with themselves. In the meantime, they missed some of the most impressive capital gain runs Australia has seen in its history.

Don’t be another stumbler – remember there’s plenty of wealth to made over a decade, but the key is to act, not wait.

The perfect is the enemy of the great

Another procrastination tool is the eternal hunt for the ‘perfect’ investment.

In truth, finding that unblemished gem is unlikely – and in the meantime, you’ll pass up a raft of opportunities that will pay very handsome dividends over the long-term.

Good property investments are out there and while they may not always be the most ideal home on the market, they will provide the type of returns that investors with staying power enjoy.

Don’t let the hunt for a flawless investment keep you out of the race so long that you gain nothing.

That applies to trying to pick the market cycle as well. In truth, there’s never going to be a ‘perfect time’ to invest because for those with a long-term plan, taking action is the only solution.

You simply can’t win this race if you don’t front up and start.

Advice pays dividends

The smartest way to reduce the risks and boost the benefits is to surround yourself with the right professionals and rely on their advice.

You don’t have to be paralysed by the research required to try and gain expertise in the field, because there are already experts out there that can work with you start the journey.

We are constantly presented with great investment opportunities and have the experience to steer our clients away from the duds.

Act now

So, here we sit at the start of another decade – did you hope to invest in the 2010s and now have non-buyer’s remorse?

If so, don’t go into the 2020s full of good intentions but without a plan for action. Take a moment this year, have a think about what you’d like to achieve and get moving.

Get your mindset right then talk to someone who can help map out a strategy, so you don’t live in regret come the end of 2029. Contact me an I will contact you with a professionally accredited property investment advisor that can assist you – 1300 710 933.

 

Buyer Beware

There are no tricks to property investment!

 

Beware of those who make sweeping statements, offer guarantees, use pressure tactics, don’t acknowledge the risk, and avoid questions or concerns.

There are no rabbits to be pulled out of hats!

But it’s not rocket science either!

As with any purchase, the onus is on the buyer to be aware.

The best way to be aware is to be educated and know the right questions to ask.

Understand that there are no guarantees. A qualified, honest property professional will make evidence-based recommendations that meet your needs (not theirs)

Understand that ‘life is what happens while making other plans’ and so your circumstances may change over time.

It is therefore important not to over-commit and to invest sustainably for the long term and to ‘stress test’ your cash flow figures.

 

Go into it with your eyes open:

 

Resilience planning for economic downturns

If this past month has taught us anything, it’s that good times can turn bad quickly.

 

In December almost every property commentator was salivating at the thought of markets on the rise. After price retractions in Sydney and Melbourne, the turnaround was beginning to gain momentum. Markets such as Brisbane were seeing long years of dormant performance coming to an end with early February 2020 indicating a bumper year was in store for the Sunshine State’s capital.

Cue forward four weeks and who could have imagined the picture before us with the COVID-19 pandemic. Millions unemployed, tenants provided a moratorium on evictions and banks offering a freeze on repayments.

Of course, the full force of the economic tsunami is yet to be seen, because the property market’s strength is directly linked to confidence. If convincing solutions to the crisis can be found quickly, then the market will return in force. Prolong the pain and the recovery will likewise be extended.

But of course, the big lesson for everyone from political leaders to entry-level workers is simple – planning pays. Here what we can all learn as property investors from the Coronavirus (COVID-19) crisis about surviving the ups and downs.

Know your path

Advisors in our network follow a 14-step process to help clients build a portfolio… and the first eleven of those step having nothing to do with property selection. So when it comes to beginning an investment journey, don’t get caught up in researching real estate straight off the bat. Instead, carefully plan your path.

Recognise your starting point and defining your goals.

Write down your current asset base and income and work out what you want them to look like eventually. Think about how long you want to take to get there and layout your prospects for future income growth. Also, consider what life events may be before you. Are there kids in your future? Is a move interstate or overseas for professional advancement likely? You won’t know all the answers with 100 per cent certainty, but most people can sketch out a reasonable idea of how they’ll get from beginning to retirement and the types of considerations that need to be added to the mix. By setting out your path, you have a reasonable plan to follow to reach your endpoint.

Assess your risk tolerance (Stress Test)

This is important because long-term investors must be able to deal with market ups and downs. It’s essential to understand how you relate to risk so you can select the right composition of property types for your portfolio. For example, you may be an average wage earner with a family that needs the surety of shelter, education and other essentials. As such, you might seek assets that compromise a little on value growth potential but provide a stronger cash flow position. Conversely, you might be a young professional on good income who can invest a bit more and bear the cost of having to tip in a little extra each month to support your investment, knowing that it has great potential for value growth. Understanding your risk tolerance means you can travel with confidence and avoid panic if the market takes a hit.

Understand your finances

It is essential to have a handle on your finances. This includes home budgets, asset balance sheets and your borrowing and loan servicing capacities. This is where an experienced mortgage broker and property investment advisor are essential. Your investment advisor can help guide you through the key numbers to make sure everything is up to date. Great advisors also implement a regular audit of your figures to ensure they’re always current. Mortgage brokers will help you seek the best loan terms and give plenty of advice on what to do to improve your chances of gaining approval. This could be for a new purchase, or when refinancing under changed circumstances.

Buffers are essential

Perhaps more than anything else, those who are most successful at riding out the market rollercoaster are investors who have buffers in place. Make sure you are not overextended continuously in your loan capacity. Similarly, ensure you can comfortably meet loan repayments and other portfolio operating costs. Finally, work toward having a pool of available cash you can draw on in emergencies. This usually is best kept in an offset account to help reduce your interest bill as much as possible. This buffer – which should cover at least three months’ worth of outgoings – means you can hunker down and ride out most unexpected hits. This buys you the one thing that we all need in a crisis – time. The buffer lets you make plans without fear and can help deliver you to another side, a downturn intact.

While maintaining personal and physical safety during these events is your primary goal, the importance of planning for financial hits can’t be ignored.

Applying the principals outlined above will help you ride out the storm.

Author: Richard Crabb | MD ASPIRE Network | PIPA Board Member