- The property market works in cycles. It is fun and exciting for a couple of years when we have a boom (like we have just been through). But during any impending slump it is no longer the in thing to be doing and can at times be hard work.
- Property should not be treated as a get rich scheme (despite some seminars beliefs). If structured properly with the correct support it can be a reasonably safe wealth creation tool.
- Use as many resources as you can. Read past discussions here and go to the library to get some books out. There is a huge range of books available at the library and it means you can read them before you buy them for your bookshelf.
- Form your own opinion based on what you believe is your own safety level. People can tell you to mortgage to say 80% but if you won’t sleep well at night due to worry don’t do it. Only go as deep as you feel comfortable.
- Try to be careful on how deep and fast you get into the property market. Use the advice from seasoned investors who have been through it all before. Most people can make money during a property boom just from buying any property. But it is buying the right property to hold long term that is harder. You will hear many stories from investors who purchased large amounts of property only to lose most of the gains during the slump. Buy the right property from day 1 and don’t be one of the statistics that need to sell up when the market tightens.
- Write down all the things that are stopping you from investing or that would affect you sleeping at night if you were investing. These are now you’re “What if’s”. What if interest rates go up? What if tenant builds a drug lab? What if the house burns down? What if house gets trashed? What if property goes down in value? What if rents drop? Etc. Now you can work on a plan to address these and lower or mitigate your risks.
- Beware: Too many people can suffer “Paralysis by analysis”. By the time they invest the boom is all but over. This is Fear of investing. What is FEAR – False Evidence Appearing Real – F.E.A.R.
Nice one Anthony.
Can you please add a commentary on the use of the right investment structures? I am continuing to get massively conflicting advice from experts on the use of trusts.
FYI – I am an active equities and property investor with 4 IP's (well, 2 becoming 4 after a strata title)
Thanks EmptyVessel!
I hope some of the following helps.
Structure
- If you are serious to be a long-term investor get a structure in place to protect yourself and your assets.
- If you are going to use any statistics for housing growth ensure you use 10 year growth figures. 1-year figures are deceptive and do not indicate possible future growth. During a boom even the poorer suburbs can experience growth that looks good. 10 year figures will most likely include a complete cycle boom through to slump. Shorter terms will miss part of the cycle and not be accurate.
- I heard an interesting stat that out of all the banks long term interest rate predictions they have had poor odds at getting it right. This would be similar to economist’s long term property value predictions I guess. Past history is no guarantee of future growth and long term factors are very hard to predict as something usually happens to alter the forecasts. (Wars, terrorism, floods, earthquakes, Asian crisis). However saying that we can usually see into the short term and be semi reliable. Using historical growth and buying in the right location at the right price can put us ahead of those blindly purchasing to follow a boom.
- A good way to protect yourself is to use the “What if’s” (See Philosophy above). Decide if you are going to protect yourself from anything that concerns you with regards investing. Most things that concern people and prevent them from investing can be covered by a well thought out plan. Do this from day one.
Finance
- Avoid using the 1 bank trap. This is simply where an investor gets comfortable with their current bank giving the bank complete control over their entire portfolio. Banks will like to cross-collaterise if given the chance. Using several banks spreads your loans around and reduces the risk of your portfolio being called up if the economy turns bad.
- Banks use Loan to value ratio (LVR/ Equity) and debt service ratio (DSR/ Cash flow) to determine your ability to acquire a loan. It is safer to drop back and keep your serviceability low at end of a boom. This will enable you to have a buffer if things get tough and let you ride out any pending downturn in the market (Slump). Historically rents and house prices usually drop back from their peak.
- Ramp up your serviceability leading into next boom. This is when you need to use your servicing to catch the wave and build some serious equity.
- Just as it is sometimes safer to diversify your property locations, you should do similar with your borrowings. Interest rate diversification. Spread any fixed rate terms over a range of dates so all your loans are not expiring at same time. Interest rates move around regularly and you do not want to be caught out needing to have your entire portfolio expire at a time when rates may be high.
- There is a large amount of opinion on Principle and interest (P&I) loans versus interest only (IO). The general consensus is if you have non-tax deductible debt e.g. personal house mortgage. Then use Interest only and pay down the non-tax deductible debt with the money you will be saving in lower loan payments. Otherwise if you have no bad debt the choice is up to you P&I or IO. IO can allow you to accumulate more property but P&I can be good during a slump too as the debt is being paid off slowly.
PS Empty V
There are no simple answers to trusts. Whether a trust, and the type of trust, is suitable to you depends on you, where you are, and what you want to achieve. Lots of things like tax minimisation and spreading of assets to consider as well as your current portfolio, are you PAYG/self employed, married, have children, SMSF…………suffice to say you probably won't get an accurate answer to what is or isn't suitable to yourself in a 'public forum'. My humble opinion is you should speak privately to a specialist professional. Feel free to drop me a line if you wish.
Thanks for the offer. I will drop you a line tommorrow for a chat.
Alot of questions people ask them selves about investing, and any other sort of typical chat on 'how to do it' I'm sure if its alot easier to research your own answers?
Instead of asking someone how come the banks wont lend you anymore money, find out the reason why?
Can't find any properties that are cash flow positive? Well your not looking hard enough or you can't see what the others can, or simply you think it just can't be done.My best opinion? Learn what you can, take everything in? Yes, but find out for yourself don't expect to have someone give you the answer.
Currently selling childrens book between 2-5yr old Learn how to ride bike!
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