What's your investment strategy ?
You will have seen this weekend’s auction clearance rates record. Melbourne’s clearance rate jumped from 69.2 percent last weekend to 79 percent this weekend. This is also a reflection of it being the first major auction weekend post the January holiday period.
With interest rates still low, first home buyers, investors and upgraders in the market, now appears as good a time as any to buy property. Especially in the lead up to the Easter period late April.
When investing however, what many people focus on is what to buy and where when entering into the property market, but they don’t consider the hold and exit components. What are these you ask? Well they form a primary component of your overall property investment strategy. Like other investment categories, property also requires its own strategy because it is so easy to get it wrong and it’s definitely not as simple as all the selling agents and property spruikers like to make it out to be. It’s easy to sign your name to a contract but it’s harder to buy an investment grade property that will achieve what you need it to over time. This is all the more important because property requires you to spend hundreds of thousands of dollars, so you will want to minimise as much risk as possible.
While it may sound boring, it’s imperative to have your property investment strategy in place before you commence the searching, research or buying process.
The strategy needs to consider a number of variables and factors. For instance, what is the financial end goal you are trying to achieve, how many properties do you need to achieve it, are they cash flow or capital growth properties and what is the mix of these in your portfolio to create diversification, cash flow management and minimise risk? Consider also your age, your (and your partners) personal risk profile, the risk level associated with the type of property you want to purchase (e.g. off the plan versus land versus established), your financial position and your borrowing capacity. Whose name or what entity will you buy it in (e.g. personal, trust, SMSF)? Once all of that has been determined, this will enable you to create a strategy or plan from which to move forward.
That plan will help you to formulate what your entry, hold and exit considerations are and you should to start with the exit in mind. The exit component is all about who will buy this property from you when you need to sell it. What is the market or demographic of the buyer for your property when you are ready to sell and how much competition will there likely be for that buyer? What is the level of scarcity associated with your property? The lower the competition, the greater the potential for your property to grow above the average in value and the greater the chance of it actually selling when you want to. Have you ever known of someone who bought what they thought was a fantastic property, only to find that they struggled to sell it when they needed to or had to substantially lower the price?
Next consider the hold component. When buying an investment property, leave your emotion out of it. It’s not about buying something that you would live in, it’s about what your tenant would live in. Who are they and what features and amenities do they need? A family requires a very different set of criteria to a single tenant or a couple. They are crucial to your ability to hold the asset long term to enable it to grow in value over time and to also generate income to allow you to service interest repayments or reduce your debt. Know who they are (or aren’t) when you search for a property to purchase.
The enter component is the ‘what’ type of property to buy, ‘where’ to buy and for ‘how much’ money. Start with your end goal, exit and hold in mind and work backwards to the enter aspect of your plan.
Most people venture into the property sphere only to have very average property sold to them by biased selling agents, project marketers or property spruikers, who often are only interested in your ability to enter the market and they don’t really have any care or level of interest in your ability to hold or sell the property in the future. They take their commission and run, leaving you holding what sometimes isn’t a good asset afterall, but it may take you years to find out. As always, buyer beware and remember you can seek unbiased help from a Buyer Agent or Advocate if you need it.
Miriam Sandkuhler - Property Advisor, Buyer Advocate and Author Contact Us