Step 1. If you’re just starting out, make sure you start right
“Remember your first property’s performance is key to unlocking more opportunity later. If you buy the right property in the right area and it increases in value in 24 months, you’ll have another deposit and will be able to get right back in the market again," cautions Sam Saggers, CEO of Positive Real Estate.
"If your investment cannot get your capital (deposit) returned within two years or you will get stuck and it could be a decade before you buy again,”
He argues that it’s essential to heavily research a number of areas before deciding where to invest.
“Your first property is what will propel your portfolio forward, helping you to reach the magic number of properties that you need. If the experience was horrible, you may never want to buy again.
Step 2. Understand your financial situation and goals
Michelle Coleman of W Financial points out that even before you start looking for your first investment property, you need to understand that you are limited by your financial capacity and therefore use this as a guide to map out your plan.
For example, she explains that it would be unrealistic for someone earning $35k with lots of personal debt to be able to get a $1million dollar portfolio or create a passive income of $100k net unless they make radical changes to their finances.
“I knew I had to earn more to achieve my goals so I went and did it,” says Coleman.
“You need to understand where you are at now financially and work backwards to see what changes you need to make to get to a desired financial situation in order to start investing.
With clients, I look at what they would like to achieve their risk profile to investing and perhaps sometimes state the obvious in relation to some personal circumstances to enable them to move forward. It’s not a matter of saying “No, you can’t do this”, but rather “What do you need to do or change to achieve this.”
Step 3. Learn as much as you can about property investing
If you want to become a truly successful property investor, director at Real Wealth Helen Collier- Kogtevs says you need to learn everything you can about every aspect of the industry.
“Study every aspect of property investing, from drivers of property price growth, to knowing how and where to do your due diligence, to being tuned into economic trends and property cycles. You need to immerse yourself in real estate until you understand every aspect of the game,” she says.
Step 4. Have a clear idea how you’re going to make money
Investing is about making money and therefore you should treat is as a business. Before rushing in and buying up real estate, Saggers advices that you first need to learn how to buy and sell profitably.
“Making profit from real estate is not just about buying or selling. Building a portfolio requires planning your fourth and fifth purchase while still on your first. “
Therefore, when buying to make a profit, Saggers says you need to treat real estate like a business and ask the tough questions such as:
When will I make money from the property?
How will I fund the next property?
Where is the next deposit coming from and how much will I need?
Is the property I’m purchasing now going to help me with my next purchase or will it set me back?
Step 5. Prepare a written detailed investment plan
If you want to be successful at property investing, then make sure you have a written business plan before you even get started.
This should include a financial plan, according to Ben Kingsley CEO of Empower Wealth. “You need this to have a clear idea on how are you going to manage your household budget to ensure you have the available cash to get the loan required to secure that new property,” he says.
Your financial plan also should include your overall financial goals and also your personal goals to make sure that your property investments will deliver those.
More importantly, your plan should be on black and white, says Kingsley.
“A written plan is proven to be a very powerful motivator rather than just some cheap talk about what you plan to do one day. A hard copy version brings these dreams and goals to life, and can be a great reminder to help maintain your focus and move forward with your property investment strategy,” he says.
Having an investment plan ensures that you’d be able to factor in the impact of unforeseen scenarios as a landlord.
“What successful investors do differently is that they plan to manage these types of situations in advance, so they won’t be vulnerable and caught off guard if and when the situation occurs,” adds Collier-Kogtevs.
Step 6. Decide on your strategy
Planning and understanding the different property investment strategies will help you design your path and move past property 1 relatively smoothly according to Coleman.
“There are plenty of ways to make money in property but not everyone can do every strategy; or even the one that interest them. Often it works well when there is a balance between different strategies. A balanced strategy enables you to move to the next property purchase more easily as there is less financial strain,” explains Coleman.
If you purchase negatively geared properties, Kelly explains that you’d run the risk of running out of borrowing capacity given that the rent doesn’t meet the mortgage repayments.
On the bright side, over a period of time, assuming some growth, you’ll be able to draw down on the equity you may have accumulated and use that for deposits.
On the other hand, if you have purchased positive cash flow properties, then while the capacity to continue to borrow money improves, the possibility for drawing down on equity generally diminishes. The risk here is running out of deposits.
“To my thinking, the most effective way to keep moving forward is to release equity and borrowing capacity through selling at the right time and for the best possible price in order to keep going, ramp up and improve your portfolio,” says Kelly.
Step 7. Reassess your situation
If you’re stuck in one underperforming property and unable to move forward, it can be difficult to escape them without making some significant decisions.
“If you’ve purchased a property that has tied you up financially, meaning you are unable to borrow more, or you do not have the equity or cash to get a second then something needs to change,” explains Kelly.
“You could wait and hope that the market moves in your favour so you can build equity and that you get that long-awaited promotion so you can borrow more. Under these circumstances you may be able to go again – but this is all “hope and pray”. You could increase the rent or rent it out by the room instead so that the income improves… but even then it may not be enough.”
Step 8. Sell and start again
If you want to get it right and be able to move forward, Kelly says you may need to sell and start all over again.
“It may be better to do all that you can to improve the property and present it really well for sale. Sell it, release the equity, free up the borrowing capacity, learn from the error in judgment, and buy the next property in such a way as to not get hamstrung again,” he says.
“This time around you now have the wisdom of what not to do. You’d seek the right advice to structure yourself appropriately and then begin to learn all about different investing strategies that will allow you to invest sustainably. With the combined knowledge of how to structure yourself and take this on sustainably, your equity position would continue to grow and the financial rewards you are after would be there for the taking.”
Coleman adds that she’s often seen clients who are held back by a property that didn’t fit their lifestyle and strategy and also favours cutting it lose in order to move forward.
“I am by nature a buy and hold investor but in certain circumstances you need to consider selling a property.”
For example, she says in cases where you have lots of equity in a property but the rental return and current loan means that you can’t service anything else, you may consider selling it to access that large amount of equity and create space for a new investment and get more return from it.
“You could also do a renovation or split a rear block and create some equity, but if you stubbornly hold on to your property without doing anything, that property could be doing you more damage than good,” Coleman explains.
