Some investors are fussy about their investment property: “I like the property but I would like the walls painted light blue”. Does it really matter? What the investor likes is different from what a tenant will like. The first tenant might like pink walls, whilst the second one will like cream walls. At the end it is best to keep to neutral colours, because investing is not about the property itself.
Investing in property is about creating wealth using property as a tool to achieve a financial goal. It is not about owning real estate, having nice tenants and friendly property managers. It is about making money. I don’t know any of the names of my tenants, I rarely visit any of my properties, and property managers handle all of the management aspects of the assets. To me, investing in property is a passive investment for busy people. I only want to hear from my property managers once every 6 months when rent is due for renewal. I then take the opportunity to have a good chat about the local property market and keep a finger on the pulse of this particular location.
When buying shares, most investors do some research about the quality of the stock they intend to buy, and ideally they should be using an experienced broker. When they don’t, it usually spells disaster. Buying shares without understanding the intricacies – and the traps - of the share market usually ends in tears.
This is why when I discuss investing in property with a client I talk about property only at the very end of our conversation. It is really all about numbers.
The conversation always starts by working out the boundaries of a strategy, ie how much can you borrow, what kind of funds are available to complete a purchase and this dictates the potential scale of the strategy. Next comes attitude to risk, aspirations, personal goals, etc..
Regarding borrowing capacity, there is no point planning to create a portfolio of say 10 properties if the investor’s borrowing capacity is $300,000. So, knowing the investor’s borrowing capacity is a key piece of information that defines how many properties he/she can buy and also has an influence on the investment location. Obviously we also discuss longer terms objectives on how to increase this borrowing capacity, and we canvass options, such as job prospects all the way down to reducing credit card limits.
In relation to “funds to complete” a transaction, this is bank jargon for how much money the investor has to contribute to the property. In other words, it consist of the deposit, stamp duty, etc..This can come from savings or by releasing equity in an existing property. Obviously the more equity/savings, the more properties an investor can potentially buy.
Banks will look at servicing and capacity to fund a purchase independently. Therefore, most investors will hit a wall with the banks at some stage. Either they will run out of cash/equity despite having plenty of borrowing capacity or vice-versa.
Once we have defined and discussed these limits, It is time to talk about a strategy going forward, and only then would we finally start talking about specific properties.
In conclusion, there is a lot of preparatory work to be done before going out and looking for a property. Most of the work is about ensuring that, as investors, we have a well thought plan and go forward with clarity of mind and purpose.
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Philippe Brach is CEO of Multifocus Properties & Finance. He has over 15 years experience in property investment and has helped many first time and experienced investors achieve their goals. He is also the well-recognised author of the book ‘Creating Property Wealth in any Market’ which lays out in detail what it means to invest in property.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property
