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Insight: Must-knows before building a property investment portfolio

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An ANUPoll from mid last year found that 75 per cent of Australian’s still view owning a home as part of the nation’s way of life. This seasoned buyer’s agent spoke to Nest Egg about the tips and traps of building a sustainable property portfolio.

However, property investment isn’t for everyone, and potential investors should be aware of the time and effort required to successfully run their investment. Steve Waters, director and co-founder of Right Property Group, says he all too often sees people drawn in by the appeal of property investment, only to struggle when they realise the level of commitment required.

“There seems to be a common outlook amongst Australians that property investment is all roses and there’s not much input once they’ve actually purchased,” he says.

A lot of people who take to social media see nothing but good results – embellished good results. So, they think it’s pretty easy and that they don’t need a team around them. That they don’t need to educate themselves. It’s just a matter of, “We’ll just buy something and move on, and we’ll make a million dollars overnight,” which is really not the case when it all starts to unfold.”

Mr Waters says it is important for investors to consider the following before diving into the world of property investment:

  • Know your own risk profile

Mr Waters says investors must first consider their willingness and ability to take risks before committing to an investment.

“If they want to know whether they should invest, not just in property but in any asset class, they need to ask, what is the risk profile?” he says.

“Will you be able to sleep at night knowing that you’ve got potentially hundreds of thousands of dollars of debt? If it’s just going to give you stomach ulcers, then it’s not for you.”

  • Understand the time input

“Property is not passive,” Mr Waters says.

“So, if you don’t have the time to actually sit down, take stock on a monthly business and manage cash flow, then, in my opinion, property is not for you.”

“It’s a hands-on investment vehicle. That doesn’t mean doing the renovations yourself, but it means cash flow management. It takes time to go through the numbers, it takes time to go through the bills and it takes time to reconciliate and treat it like a business. Successful business owners take time in their business and on their business.

  • Keep up to date

Once the property is purchased, Mr Waters says it is important that investors continuously educate themselves on the current property market and the economy as a whole to understand how their investment is faring.

“You need continuous education on financial literacy,” he says.

“Finance is an ever-moving environment, so to speak, and so is the property market – your rents, your rates, and so on and so forth. So, continually educating yourself is a cornerstone of being successful.”

“There is so much free education available. You don’t need to go and pay $5,000 on a course. It’s already out there. The trick, though, is being able to decipher what is actually fact and what is fiction.”

Mr Waters recommends speaking with or reading the material of advisers who have a long track record in the property market, as they will understand its fluctuations and cycles.

“Take the education from people who have been around for multiple property cycles and have been in the industry for quite some time,” he says.

“They’ve experienced the ups and downs and sideways of the market, rather than being the ‘hero adviser’ of the last five years, where you could essentially throw a dart at a dart board and have a good result in the Sydney market.”

He also highlights the importance of understanding the economy as a whole, alongside the patterns of the property market.

“Understanding the financial environment is as important as understanding the isolated property market, as often, the financial environment has a direct outcome on property markets,” he says.

“So, if you don’t want to allocate the time to have a basic understanding of the fundamentals of the economy, then you’re not really giving yourself a chance.”

“At one stage or another, the economy is going to point you in the right direction of where to invest or even if you should invest.”

  • Speak to a qualified adviser

“I’d probably suggest the very first thing you do is speak to a qualified property adviser or an accountant,” Mr Waters urged.

“Because, from the very outset, you need to establish what your affordability price point is. That means the amount of surplus cash flow you will have after paying the mortgage and the rates and then subtracting the income from that. We talk about negative cash flow on a monthly basis. So, what can you afford, and will you have ample buffers in place in the event of the worst-case scenario.”

  • Speak to your mortgage broker

Mr Waters asserts it is important for investors to understand not just how much they are eligible to borrow, but how borrowing the full amount could affect them in the long-term.

“You need to operate within your risk profile bandwidth, as we call it. Just because you can borrow a million dollars, doesn’t mean you should spend it. There’s a difference between the way the banks assess you and what’s reality,” he says.

  • Understand the reality

Lastly, he recommends investors crunch the numbers to ensure they are covered financially in the event of the worst-case scenario.

“Do the numbers, do the numbers, do the numbers,” he says.

“Don’t think that property is all about glory days every day. You will have vacancies; you will have interest rate fluctuations; and you will have times where the market goes sideways. It’s just not this lineal trajectory.”

“So, always account for the worst. That way, if you can survive the worst, anything above that is good.”

Insight: Must-knows before building a property investment portfolio
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