The 7 Plans Every Property Investor Must Know To Succeed
When it comes to property investing as the saying goes, if you don’t have a plan, then you could be planning to fail! While there are many factors we can’t control in the market, there are certain facets we can manage to give us the best possible chance of success. In this article we will help you understand the 7 plans every property investor must know.
Starting out in property investment can be overwhelming, and most Australians don’t even embark on the journey because they simply think it is out of reach. Even the most successful property investors will tell you that they are not experts in all things accounting, tax minimisation and property management. The key to building a thriving property portfolio is to plan and do it well. With that being said, here are the 7 plans every property investor must know to go the distance and win at real estate.
THE THREE PHASES OF PROPERTY INVESTMENT
First though, here’s a broad overview of what a standard investor journey throughout the years looks like.
There are three phases when it comes to building a property portfolio that every investor must navigate. Real estate is a long-term investment strategy and the course of these phases usually spans a 15-20 year period.
The acquisition phase is when an investor should be in growth mode. It is generally the stage between three to seven investment properties. Your main goal will be to acquire as many properties as possible in a safe and sensible manner.
During the acquisition stage, you want to be focusing on high growth properties in a variety of locations in order to make the most out of your equity gains. To do this, you will need to understand what drives the market.
When you get to the stage where the banks won’t lend you anymore money, you’ll need to begin refining your investment portfolio. In order to secure more lending you will need to reduce your debt and simultaneously increase your income. To move into a positive cash flow phase, you will need to lower the loan-to-value (LVR) ratio of your portfolio. What this means is that you’ll need to reduce the amount of debt you have. You can do this through selling non-performing properties, renovating to add value or reducing the rate at which you purchase properties.
This is the point in your journey where you can truly start benefiting from all your hard work as an investor. Your property portfolio will be at a point where it is generating enough income for you to retire (whatever that looks like for you).
Once you get to the stage where you’re living off the income produced from your assets, you might like to consider a more conversative approach to investing, in order to protect your assets.
THE 7 PLANS EVERY PROPERTY INVESTOR MUST KNOW
These are the 7 plans every property investor must know if they want to create legacy wealth through real estate. If you’re asking yourself how do I make a property investment plan? You’ve come to the right place.
Having a plan that outlines how you are going to grow your property portfolio will be integral to your success. When creating your acquisition plan, the key thing to remember is that you want to grow as fast as possible. Some investors believe that when the market is flat they should stop and wait for another boom. This couldn’t be more wrong. Property is a long-term investment so it doesn’t really matter when you buy in the market cycle, just as long as you get in it.
With new investors, common flawed thinking is to find a market that suits your budget. If your budget doesn’t quite reach the average house price in sought-after areas, then you may start looking as far out of the city as possible in a location with very little prospect for growth.
However, if you want to build lasting wealth then you must focus on high growth properties and in order to do this, you need to understand what drives the market:
- Infrastructure – spending on infrastructure points to a growing economic base
- Yield variation – signals growth
- Supply and demand – indicates need in the marketplace
- Population – fuels growth in an area
- Economics – reveals clues to an area’s capacity for growth
- Demographics – influences growth – as incomes grow, so do property values
Each of these factors will help you identify where you should be investing. As mentioned, you need your money in strong future-proofed economies. For example, in larger cities, you are more likely to achieve consistent capital growth. This is because property prices in cities tend to recover more quickly from economic downturns. Cities also have diversified economies which means there is always going to be jobs which bring people to the area. This will keep demand for housing resilient, making it easier for you to find a tenant.
Once you’ve found a location, the next step is to find a good property. Any successful property investor will tell you that money is made at the time of purchase. This is why you’ll have to learn the art of negotiation.
Of course the market generally dictates what kind of discount you may be able to secure, if the market cycle is at the bottom then you’ve got a great chance of getting a discount – more so than when it’s strong. Here are some proven tips and strategies designed to help you tilt the odds in your favour:
- Speak with authority: those that are well informed make better decisions. This is especially true when it comes to making an offer on a property. By doing proper due diligence, you’ll have more confidence and this will be reflected in the negotiations.
- Listen closely: It’s helpful to understand human nature when negotiating, so it’s worth the effort to learn how to identify both verbal and nonverbal cues that may reveal hidden information.
- Silence is your friend: During negotiations, moments of silence can be unnerving to some individuals. Use this to your advantage. For example, if you’ve received an offer that doesn’t meet your expectations, pause before responding, you might be surprised at what happens next!
In order to conduct business safely during the acquisition stage of your property investing journey, you need to create a lending plan. This plan will detail how you are going to get the funds to finance your purchases.
When it comes to securing lending, a common mistake that many new investors make is that they limit their buying options by only looking at lenders that offer cheap interest rates. What these investors fail to understand is the value in building a portfolio of good properties in growing locations right now.
For example, you could approach a major lender (big banks) and get approved for a $600k loan with a 3.5% interest rate. Depending on the area, lets just say you’re able to purchase 45 minutes out from the city in a small suburb with no prospect for growth. In comparison, if your lending plan allows you to consider second-tier lenders that may offer you $750k at a 5% interest rate you’ll be in a much better position to purchase in a growing economy (closer to the city). Whilst your finance costs more, you will likely make more money through capital growth down the track.
For most investors, their lending plans will have a provision for securing finance from second-tier lenders, because even if the major banks have a cheaper interest rate, their terms are often restrictive. A second-tier lender is a non-bank entity, making them exempt from some of the more rigorous APRA requirements. This doesn’t mean they’re free to do as they please, you can have peace of mind knowing that they are regulated by the Australian Securities and Investments Commission (ASIC). The goal of the ASIC is to protect investors like yourself while enforcing Australian finance law.
Having access to funding is super important when it comes to property investing, and having the cheapest interest rate should be the last thing you consider.
Tax management plan
Owning real estate can actually be incredibly tax effective. When it comes to property investing there are a lot of things that you can’t control such as the market, interest rates, and yields. However one thing you can control is your tax – through managing it.
There are four main taxes that property investors pay:
- Land tax
- Stamp duty
- Capital gains tax
And if a company owns your property portfolio then you will also need to be across goods and services tax (GST) and company taxes.
For many investors, tax breaks make it affordable to own an investment property in the first place. So when it comes to managing your taxes you need to ensure you’re across it. This does not mean you need to understand tax law in depth, but having a basic understanding will help you (and your accountant) in the long run.
A smart investor will have provision in their tax management plan for how they can use tax to pay for their properties. Let’s say you purchase a property for $500k, the rental return is $500 per week and the property expenses are $601 a week. So your property is making a loss, and the great benefit of being a property investor is that you can claim tax back and get depreciation. So on this brand new $500k property you can claim back $152 per week. With a PAYG withholding variation, you can receive the $152 tax break each time you’re paid.
Property management plan
Every investor knows that real estate is a long term game. In order to keep your properties in tip-top condition over this time, you need to invest in an amazing property management company right from the start – at the beginning of the acquisition phase.
Your property manager will spend more time at your property (your biggest asset) than you and therefore you want to ensure you have the right team on your side looking after your properties.
Let’s say you get dumped with an inexperienced property investor, they do an average job of looking after your property, it gets ruined by your tenants and you become fed up. Your property management company refers you to a real estate agent who convinces you to sell, and then you’re out of the game. This is the potential cost of not investing in a good company.
Debt reduction plan
As mentioned above, you move into the consolidation phase once you’ve exhausted your ability to recycle equity. As a quick reminder, equity is the difference between the market value of a property and the mortgage against it. A common strategy in an investor’s lending plan is to borrow against the available equity in a property.
Capital growth in the form of equity is useless, unless you can access it. In order to access it you need to lower your loan-to-value ratio by reducing your debt, or increasing your income (rental yields).
It is completely normal to get to a point in your investment journey where you need to take a break for a year or two whilst sorting out your finances. What you can do during this period is put every single dollar you have into your offset account. An offset account is an account linked to your mortgage that operates like a transaction or savings account. It offsets the balance in that account against the balance of your home loan, so you’ll only be charged interest on the difference.
Your financial plan should be operating in the background throughout each of the phases of your investment journey. Creating a financial plan will set you up to ensure you’re building wealth for the right reasons.
Your financial plan should include the following attributes:
- Specific goals that define what you want to achieve and which are aligned with your values and your personal situation.
- Clear, actionable steps that lead you towards your goals.
Your financial plan will also identify how you are aiming to fund your retirement outside of real estate, such as through your Superannuation or shares.
Wealth acceleration plan
The wealth acceleration plan takes place in the lifestyle phase. The lifestyle phase of an investment property career is the place the property investor is striving towards. You’ve built your portfolio to a point where it is generating enough income for you to retire (in whatever way that is to you).
With capital growth in the market over 15-20 years your portfolio will (hopefully) be worth a lot more than the initial cash you invested. A wealth acceleration plan will map out how you are going to put this equity to work. When you get to this stage it can be easy to fixate on the cost right now, this is where many investors go wrong. In order to quantum leap your wealth to new heights you need to understand the long-term value of your investment.
BUILDING YOUR 7 PLANS WITH THE RIGHT TEAM
A list of 7 plans every property investor must know is all well and good but we all know how hard it can be to stay on top of all the aspects of property investing, particularly in those early stages.
In order to successfully apply these 7 plans across these three stages, it pays to enlist some help. That’s where the Positive Real Estate team comes in. Our team has over 18 years experience in property investment coaching.
Come along to one of our free property investing masterclasses. This two-hour event will give you the opportunity to ask questions to our experts, connect with key people in the industry and develop the support team you need to succeed in real estate.
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