Whether you’re new to the game or you've already built a property portfolio you’ll probably benefit from what I'm about to share, because even though each investor's needs are different, it's always interesting to know what other people are doing, and it may give you a reference point or a new perspective from which to think about your own plans and what you could be doing.
And while I’m going to share how I'm going to be investing in 2023, and how we’ll be advising our clients at Metropole, in truth it's not that different from how I invested in 2022 or in years gone by, because over many, many years I have fine-tuned a strategy that has worked well for me and has helped many of our clients reach the ranks of those top 1% of property investors you own six or more properties.
1. Firstly I’m going to focus on capital growth.
As long as I've been investing there has been the question of whether to invest for capital growth or for cash flow.
Now to be honest I'm greedy and I want both, but there’s no doubt that the more important factor to focus on is capital growth because that's where the real wealth in property investment is made.
If you speak to anybody who has owned property for any length of time and they work out how much rent they have collected, and particularly how much they've kept after tax and expenses, and they then compare the tax free capital growth they have made, invariably the capital growth will be significantly more.
Now I understand that cash flow is important, especially at time of rising interest rates and increasing holding costs for your property.
But remember that cash that keeps you in the game, while capital growth gets you out of the rat race in the long term.
Moving forward, as our property markets move through the next stages of the property cycle, we will have a number of years of subdued capital growth, and the markets will be fragmented with some areas significantly outperforming others with regards to capital growth.
And, in general, these will be areas where the locals will have higher incomes and can afford to and will be prepared to pay to live in those locations.
These will also be the gentrifying suburbs of our capital cities.
Recognising that the location of my investment properties will do around 80% of the heavy lifting of my returns, I will remain focused on areas that I believe are primed for capital growth.
2. I will only invest in a capital city.
Even though there will be investment opportunities in many regional towns around Australia, there will be more great opportunities in our 3 big capital cities where economic growth will lead to wages growth and stronger population growth, particularly through immigration.
I’ll be looking for locations within those cities that are in continuous strong demand by an affluent demographic – locations where people really want to live and aspire to live and are able and prepared to pay to live there.
These should also be areas where there is strong demand from affluent tenants who can afford to and prepared to pay higher rents and will be able to do so over the long term.
Remember, your future cashflow will be dependent upon your tenants’ ability to keep paying you higher rents.
And of course, these locations are likely to remain resilient though all stages of the property cycle.
This means I will avoid investing in outer suburbs where more people are living week to week and where they are being hurt more by the increasing cost of living as well as rising mortgage costs or rent.
I will also avoid investing in potential future hot spots which may or may not lead to short-term capital growth and then become not spot.
3. Investment grade properties.
I'm only going to invest in prime properties, what I call “investment grade properties” as this is the type of property that gives you the most growth and an easier ride along the way.
In my mind less than 4% of properties currently on the market are investment grade.
Of course, there is plenty of “investment stock” out there, but don’t confuse the two.
You see... any property can become an investment - just kick the landlord out and put a tenant in and it becomes an investment, but I'm only going to invest in properties that will generate wealth producing rates of return
Investment-grade properties:
- Appeal to a wide range of affluent owner-occupiers
- Are in the right location. By this, I don't just mean the right suburb –one with multiple drivers of capital growth - but they’re a short walking distance to lifestyle amenities such as cafes, shops, restaurants and parks. And they’re close to public transport – a factor that will become more important in the future as our population grows our roads become more congested, and people will want to reduce commuting time.
- Have street appeal as well as a favourable aspect or good views.
- Offer security - by being located in the right suburbs as well as having security features such as gates, intercoms and alarms.
- Offers secure off-street car parking.
- Have a high land-to-asset ratio - this is different to a large amount of land. I'd rather own a sixth of a block of land under my apartment building in a good inner suburb, than a large block of land in regional Australia.
- Have the potential to add value through renovations.
4. Properties to which I can add value
Over the next few years it is likely that we will have a period of subdued capital growth, so rather than waiting for the market to do the heavy lifting I would only buy the type of property to which I could add value through renovations or redevelopment.
That doesn't necessarily mean I would have to undertake the renovation or development straight away, but I like to buy properties that have upside potential.
I have in fact, I have just completed a two townhouse development in a bayside suburb of Melbourne that I'm holding as a long term investment, and we've just commenced a subdivision and 2 house development in an inner Brisbane suburb – in both cases manufacturing significant capital growth.
5. I would only buy a property that fits in with my long term investment strategy
It’s important to remember that property investment is a process, not an event.
And it’s a long-term process.
In fact, it’s likely to take you 20 to 30 years to develop a big enough asset base to give you the cash flow for the lifestyle you desire.
The difference between the average property investor and a strategic property investor is that most property investors find a property they like and then look for some data to justify their preconceived decision – this is an emotional decision and we all know emotions and investments don’t mix well together.
Instead, a strategic investor starts their investing process with a plan in place.
Fact is, you need to plan - attaining wealth doesn’t just happen, it’s the result of a well executed plan.
Planning is bringing the future into the present so you can do something about it now!
Just to make things clear...buying an investment property is NOT a strategy!
It's important to start with the end game in mind and understand what you need and what you want to achieve.
And then you have to build a plan, a strategy to get there.
The property you eventually buy will be the physical manifestation of a whole lot of decisions that you will make, and they must be made in the right order.
If you’re a beginner looking for a time tested property investment strategy or an established investor who’s stuck or maybe you just want an objective second opinion about your situation, I suggest you allow the team at Metropole to build you a personalised, customised Strategic Property Plan.
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because we’ll help you:
- Define your financial goals;
- See whether your goals are realistic, especially for your timeline;
- Measure your progress towards your goals – whether your property portfolio is working for you, or if you’re working for it;
- Find ways to maximise your wealth creation through property;
- Identify risks you hadn’t thought of.
And the real benefit is you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.
Click here now and learn more about this service and discuss your options with us.
Your Strategic Property Plan should contain the following components:
- An asset accumulation strategy
- A manufacturing capital growth strategy
- A rental growth strategy
- An asset protection and tax minimisation strategy
- A finance strategy including long-term debt reduction and…
- A living off your property portfolio strategy
Click here now and learn more about this service and discuss your options with us.
6. Focus on the long term.
An important factor that will help investors win at property this year will be to focus on the long term.
If you let yourself get scared or distracted by all the noise the media will keep throwing at you this year, it's likely that you will not do anything.
This is likely to be a year of mixed messages in the media as the world's economies and Australia’s economy will still be facing many headwinds.
However, eventually inflation will come under control and interest rates will stop rising and then our property markets will reset, and a new property cycle will begin as buyers and sellers regain confidence.
But during times of transition like this there will continue to be mixed messages in the media and the property naysayers will have a wild time telling us how our property markets are going to crash.
Over the years I’ve found there are better investment opportunities available when there is confusion and concern compared to during booming periods like we experienced in 2020-21 when FOMO (fear of missing out) caused buyers to pay a premium.
Of course, there's no point trying to time the market.
And there no point trying to judge the performance of your property over the short term, because if you have a long term focus and plan to hold your property for 10, 15, 20 years or more, even if it’s value goes down a little in the short term before the market starts rising again, it really won't matter over the long term.
Much more important will be the quality of your asset and its long term future growth potential.
In other words, if it's the right investment to hold for the next decade, then perfectly timing the market at present will make very little difference.
Now I know intuitively most people will nod along and agree with this, but I’ve found it very difficult for many people take action when the media is full of negative messages.
The best way I've found to overcome this type of procrastination is to focus on the long term and make your investment part of a long-term strategic plan as I have just discussed.
7. Understand how property really works
Another way I'm going to invest in property this year is to treat it as a business, rather than as set and forget asset.
But many people misunderstand what I mean when I say treat your property as a business and they think I mean it will generate cash flow like a “business.”
But as I've tried to explain, residential property investment is a strategy to grow your wealth in the long term, not to generate your wealth in the short term.
Residential real estate is not an asset class which will churn out sufficient cash flow to support your lifestyle in the short term.
Your long term property journey is likely to consist of 4 phases:
- The education stage
- The asset growth stage of your investment life which could take 20 years or more
- When you have a substantial asset base you then enter the transition stage where you slowly lower your loan to value ratios
- Then can live off the cash flow of your property investments and other assets.
In other words, you have initially need to make your money elsewhere through your job or profession and move it into property.
However unfortunately on the Internet you will hear the opposite.
The spruikers are out again telling you how residential real estate can generate cash in the short term and be your property business.
But that's not how property works – you use property to grow your wealth, but not generating wealth or surplus cash flow in the short term.
What about you...
What are your property plans for 203?
While there will be ups and downs and lots of problems ahead, we are indeed a lucky country and our economy will remain the envy of the developed world.
So, if like me, you are confident that Australia has a prosperous future and at the same time our population is going to grow, this means we’ll have more people who will need property for shelter and their prosperous lifestyles will allow them to afford quality property.
This means the long-term viability of our property markets is assured.
Sure in the short term there will be some challenges but there will also be some great opportunities.
Owning real assets is a powerful wealth creator and with our property markets set to bottom out and reset sooner rather than later, a whole new generation of property millionaires will be created over the new decade.
However, if history repeats itself, and it most likely will, most people who get involved in property investment will not become financially independent.
Many will buy the wrong property or in the wrong location or not have a strategic plan or the right finance structures.
So my suggestion is to get a good team around you who have no properties to sell, but who can offer you independent, holistic investment advice – like the award winning team at Metropole can.
