The secrets to successful property investing |The cost of financial freedom
Feb 11, 2019
How do I invest?
What approaches do I use and which strategies do I use?
There is no “secret” to successful property investing, but there is a strategy I use to boost my chances of success.
It is to firstly build my asset base through capital growth and then, once I’d built a substantial asset base, to move to the “cash flow” stage of investing.
When my properties increase in value this gives me equity for my next deposit and the greater rental growth helped pay the mortgage.
The next stage is to slowly lower the loan-to-value ratio (LVR) of my property portfolio and then to start living off my “cash machine” of properties.
You see…while cash flow management is important to keep you in the investment game, it’s really only capital growth that’ll get you out of the rat race.
A big mistake I see many investors make is chasing cash flow positive properties early in their journey and never achieving a sufficiently large asset base.
My Top Down Approach
Over the years I’ve honed my property investment strategy to find that 5% of properties that I like to call “investment grade” properties, – ones that are likely to grow at wealth producing rates of return.
I use what I call a “top-down approach” to my investment selection.
- The Right Stage of the Economic Cycle
- It starts with buying at the right stage of the economic and property cycle.
- I look at the big picture – how’s the economy performing and where are we in the property cycle?
- The Right State
- Then I look for the right state in which to invest – one that’s in the right stage of its own property cycle.
- While I’m not trying to time the cycle, I don’t want to buy right at the peak when I’ll have to wait longer for capital growth.
- I only invest in our larger capital cities, where there are multiple pillars to the economy – because this is where economic growth and wages growth will occur.
- The Right Suburb
- Then within that state, I look for the right suburb – one with a long history of strong capital growth outperforming the averages.
- I’ve found some suburbs have 50 to 100 per cent more capital growth than others over a 10-year period.
- It’s all about demographics, as these suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals will be prepared to, and can afford to, pay a premium to live because they have higher disposable incomes.
- In general, they’re the more affluent inner- and middle-ring suburbs of our big capital cities, so I check the census statistics to find suburbs where wages growth is above average.
- Clearly my approach is very different to the speculative approach some investors adopt looking for the next “hot spot”.
- The Right Location
- Once my research has shown me the suburb to explore, I look for the right location within it.
- Some livable streets will always outperform others and in those streets, some properties will always be more desirable than others and outperform as investments by increasing in value.
- Think about the suburb where you live – there would be areas you’d happily live in and areas you would avoid, like on main roads or too close to shops, schools or commercial areas.
- The Right Property
- I search for the right property using my ‘6-Stranded Strategic Approach’ and finally I look for…
- The Right Price
- I’m not looking for a ‘cheap’ property (there will always be cheap properties around in secondary locations). house price tag market property cost save home growth data statistics trend
- I’m looking for the right property at a good price.
- I choose my properties in that order – a top-down approach – which leads many people to ask why price is at the bottom of the list.
- You make your money when you buy because you buy the right property – one that will be in continuous strong demand by both owner-occupiers (who push up property values) and tenants (who help you pay off your mortgage).
- To ensure I buy an investment property that outperforms the market I use my…
6-Stranded Strategic Approach
I buy a property that
- Would appeal to owner occupiers – This is because owner occupiers will buy similar properties pushing up local real estate values.
- Is below its intrinsic value – that’s why I avoid new and off the plan properties, which come at a premium price.
- Has a high land to asset ratio – that doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
- Is in an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area – This will be an area where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes.
- Is a property with a twist – something unique, or special, different or scarce about the property, and finally…
- Is where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
Each strand represents a way of making money from property and combining all five is a powerful way of putting the odds in my favour. If one strand lets me down, I have three or four others supporting my property’s performance.
IT DOESN’T END THERE…
While most investors just buy a property and hold it for the long term, strategic investors regularly review their investment portfolios.
It makes no sense to invest in a property and then not review its performance every year or so.
I like to look at my property portfolio’s performance at least once a year.
- Are my properties performing to my expectations?
- Are they outperforming the market?
- If that property were for sale today would I buy it again?
- Does this property still fit in with my overall plan?
This is also the time to assess how our shifting markets will affect your property portfolio.
What would happen to your position if interest rates were to rise 1% or 2%? Because in due course they will.
It’s also the time to assess your Loan to Value ratio and your cash flow to see if you can afford to buy another property or two.
Over time you grow, your skills improve and your circumstances change, so treat your property investments like a business and evaluate your assets dispassionately.
So as I said earlier – there is no secret to property investment success, just a strategy.
While most investors read a book or two, do a little research and then buy one of the first properties they come across, strategic investors are smarter than that.
They follow a system that is rooted in the real world and has stood the test of time in changing markets.
So now you know the “secret”, what will you do with it?
Links and Resources:
As mentioned in the show:
Special 2 for the price of 1 Book Bonus: How to Grow a Multi Million Dollar Property Portfolio - in your spare time PLUS What Every Property Investor Needs To Know About Finance, Tax And The Law.
Metropole Property Strategists
Some of our favourite quotes from the show:
“I look for aspirational suburbs. Suburbs where people aspire to live there.” –Michael Yardney
“I’ve found that following my six-stranded strategic approach, you minimize your risk, and you maximize your upside.” –Michael Yardney
“Financial freedom comes at a cost. It comes at a cost of sacrifice, giving up things now for the future, and it comes at the cost of delayed gratification.” –Michael Yardney
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