Why is it that only 10 per cent of all property investors own more than two investment properties, and only one per cent own more than three?
It’s clear that property prices have become a national obsession.
Whether you’re scanning the market to find your first home, looking to upsize, planning to downsize, dipping your toe in as an investor or you’re a seasoned professional, residential real estate has become a constant topic of conversation.
The recent boom has only heightened the nation’s love affair with property, with the news media peppered with tales of skyrocketing house values, predictions about what the future may hold and discussion about possible measures to address affordability concerns.
Given the level of interest, it is perhaps surprising that more people have not embarked on building a property portfolio to secure their financial future, but there may be some fundamental flaws in strategy that are holding potential investors back.
There are 25 million people in Australian and 2.3 million Australians own one or more investment properties. That’s about one in eight adult Australians.
When you drill down further into the numbers, 70 per cent of all property investors own one investment property and 90 per cent, own just one or two.
These numbers have hardly changed over the years despite multiple property ‘booms’ taking place.
So why is it that only 10 per cent of all property investors own more than two investment properties, and only one per cent own more than three?
Mostly, it’s not due to fear or a lack of desire. Most investors would love to expand their holdings but there are six key reasons that prevent people from growing their property portfolio.
It’s all about the land
Land is always at the top of the list and should be front of mind for any investor. It is the only part of a property that grows in value, while a house (or units) will depreciate over time. It is the increase in the value of the land that can then be reinvested to grow a portfolio. I make it a rule of thumb to have at least 40 per cent land content in any property purchase. It may sound simple, yet one in two investors buy units.
Choose cash flow positive
To build a portfolio of properties it’s crucial to have strong cash flow and to do that, you need to have cash flow positive properties. Again, fairly straight forward, yet one in two property investors opt for negative cashflow instead.
Fifty per cent of property investors get the first two fundamental rules wrong, which puts the brake on any plans they may have had to grow their portfolios.
Different financial institutions have different rules around loan to value ratios, debt servicing and income calculations. Therefore, it’s important not to have all your eggs in the one basket. I always advise investors to have different loans with different banks, particularly when it comes to your own home.
Buy brand new
It’s not only important to have positive cash flow – that cash flow needs to be consistent and predictable. New properties are low maintenance, attract the best tenants and carry all the structural guarantees. Therefore, they provide the consistent and predictable cash flow you need if you’re building a portfolio of multiple properties.
Multiple capital cities
While some regional markets have performed very well over the last 12 to 18 months, capital cities have proved to be much more reliable for capital gains due to ongoing demand triggered by population growth, jobs and infrastructure investment.
While the median house price in any given capital city might double every 10 years or so, they are not all moving in the same direction at the same pace and at the same time. They each have their own property cycle, with 60 to 80 per cent of the growth occurring in a two to four-year window. With that in mind, it’s important to invest in property at the right time of the cycle and in multiple markets to ensure your portfolio is growing more than two to four-years in a 10-year cycle.
Know your bank valuation
You should always get a copy of your bank valuation, whether for your own home or investment properties. This allows you to understand the sales evidence being used and, where appropriate, to challenge the valuation in a moving market. It could be the difference between having enough growth in the property to add to your portfolio, or being forced to sit on the sidelines for another six to 12 months.