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Property investment is a great way to grow wealth and finance retirement but the biggest mistake most investors make is to stop at one property.
According to the Australian Bureau of Statistics, about one in five (21 per cent) Australian households own a residential property other than their usual residence.
It says 68.4 per cent of those own just one investment property, 20.3 per cent own two properties, 7.2 per cent own three properties and 4.3 per cent own four or more properties.
There are six common mistakes that cause 90 per cent of all property investors to only own one or two investment properties.
Not buying land:
The first rule of investing, whether it be in property or something else, is to invest in a way that increases the asset’s value over time.
The median house price has increased over time by 4 per cent above inflation but at the same time land prices have increased by more than 8 per cent above inflation.
When it comes to real estate investing you should be investing in land, you will need a building on that land to rent out and help pay down the mortgage, but it is the land and its location that grows in value, so it’s important to get that component right.
It sounds simple yet half of all property investors buy units, where the land content is very minimal.
Sticking with one bank
All the banks have different policies around servicing, loan value ratios, loan income ratios, etc.
Many people become stuck on owning one or two investment properties because all their business is with one bank and the properties are cross-collateralised.
Negative cash flow
If you are seeking to own more than one or two investment properties, it’s important those properties are cash flow positive. That way you have enough income to service the debts, particularly as interest rates go up and down over time.
According to the Australian Taxation Office, only half of all property investors own cash flow positive properties.
Buying an existing property
While it’s important to have cash flow positive properties, it’s also important to have reliable and predictable cash flow.
New or near new properties deliver more reliable cash flow because they have the lowest maintenance costs, highest occupancy rates and generally attract stronger tenants.
Not getting an up to date valuation
Getting a copy of your bank’s valuation on your existing property, or at least the sales used, can be the difference between adding to your portfolio or not.
The Brisbane and Adelaide median house prices are up 10 per cent for the year, whereas valuers are often taking into account sales that happened in the last three to six months. It’s therefore important to make sure the most appropriate sales are being used to determine your property value, and whether you have enough growth to put toward duplicating your portfolio.
Only buying in one market
It’s important to own property across multiple capital cities. That’s because not all markets grow at the same time. About 60 per cent to 80 per cent of the growth in a ten-year cycle happens in a two to four year window.
Having property in just one market could mean growth in your portfolio only for two years out of every ten, versus someone with properties in multiple capital cities that might see growth five years out of every ten, meaning they can add to their portfolio more frequently.
There are three ways to do this:
- Buy an asset that will grow in value
- Protect your cash flow
- Repeat your success over and over by reinvesting that growth in more assets that will grow.
Once the initial acquisition grows in value that equity can be used to invest in the next one and so on.
It sounds really simple, and it is, but it is not easy. It won’t happen overnight, it takes time, and requires patience and discipline.
When investing in property, it’s also important to:
- Buy the right type of property that is going to increase in value.
- Maintain good cash flow.
- Persevere year after year (this is the thing most investors find hard to do).
This method, called compound growth, is really the secret sauce to investing.
The majority of property investors only own one property because they buy the wrong property that doesn’t have good cash flow, so they can’t repeat the exercise.
It’s important investors buy the right property in the right location. In terms of picking a location, it needs to be within a 45-minute drive of a capital city, have strong future population growth, plenty of employment nodes and good lifestyle amenity.
That will ensure it is a location where plenty of people are looking for housing.
When that location is identified it is a good idea to buy something below the median house price in an area that has a high established capital benchmark.
Buying in a growth area not only maximises capital growth but also ensures high tenant demand, which will help generate income.
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