OPINION: LESSON number one – it is not how much you earn; it is what you do with it that counts.
Entering the investment world at the age of 22, I was able to semi-retire less than a decade later. How? Thorough research and commitment to finding what works and what doesn’t work in the property industry.
An important lesson is that ‘rules are meant to be broken’. The property market is an ever-changing organism. You therefore should always research credible theories and formulas but always consider what suits you and your circumstances.
For example, I have always said that there is a major benefit to keeping all your loans stand alone, because if one of your properties rises by $50,000 and another one falls by $50,000, it’s possible to refinance the equity out of the one that has risen. If the bank has all your loans cross securitised, they will often insist on revaluing all of the properties, and if the net increase is zero you won’t be able to release any equity.
Despite this being one my ‘rules’ I have recently decided that this system can be broken. Why break it? I was able to borrow more money, get a cheaper bulk discounted rate and make accounting easier. In a shape shifting industry there’s never a clear right or wrong answer – just pros and cons.
The third lesson is to learn to deal with market volatility. The worst reality in investment property is that it is radically affected by the ups and downs of the economy. If I could change one thing in life it would be these ups and downs. Large volatility in the economy, the share market or the property market is never a great thing as it can lead to irrational decision making. However, it doesn’t automatically mean the property market will drop when the share market falls significantly.
At the moment, a number of economists are predicting interest rate drops, which should give optimistic enthusiasm to property owners and investors. Even if property values temporarily drop slightly, lower interest rates will make it more affordable to hang on to your property – meaning you’re less likely to have to sell it.
For the time being, investors should stick with what they have and if they are in a strong financial position, then they should consider investing as there are plenty of opportunities in the market at the moment. The temporary drop is insignificant if you look at it over a 10-20 year time frame and have the ability to not be put in a forced sale position.
My fourth lesson is to buy properties – not sell them. Selling property incurs many unforeseen costs and taxes. Chances are, if you’re selling, you will be using the money to buy another property anyway. If you’ve bought the right investment in the first place, it doesn’t make much sense to sell. The perfect property portfolio will include an assortment of new off-the-plan properties to get growth with little deposit and second hand properties that can be renovated to add immediate value.
Diversifying your property portfolio across a number of smaller value properties in different geographical areas should ensure that most are fully tenanted and that you don’t face any unforeseen issues.
While a portfolio of several properties will be more difficult to manage than a single one, for a percentage of the rent you can easily outsource the management to a professional property manager.
I’ll put this into perspective: if you bought a property for $500k which eventually rose to $1m, what would occur if you sold it to buy another one?
With this property in mind, real estate agents fees would be about 2%, which would equal $20,000. Then there are buying fees, which would equal $92,000 and the costs keep rising.
Yes, having more debt is risky to start with, but as soon as the properties grow in value you can release equity. This gives you a buffer zone to guard against interest rate rises and other expenses and helps you grow your wealth.
By Chris Gray.*
Chris Gray is CEO of Empire which builds property portfolios for other people – searching, negotiating and renovating on their behalf. Chris is also the host “Your Money Your Call’ on Sky News Business channel.
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