Richard Sheppard is the Managing Director of inSynergy Property Wealth Advisory.
Which strategy is right for me?
Last month, we examined the second step to successful property investment – research. We looked at macro and microeconomic based research and how it can increase your chances of buying property in higher return areas.
Just as important is the third step to successful property investment – strategy. While a good property investment strategy should be individually customised to your unique situation and financial circumstances, the general approach for most strategies is: buy as much well-located, quality property as you can, and hold it for as long as you can safely.
To make this approach easier to understand, it is important to break it down in to individual parts. To increase your capital growth, it is important to hold as much property as you can. Of course, the amount of property an individual can hold will vary considerably depending on individual circumstances, but while this is sometimes overestimated, it is usually highly underestimated.
Capital growth is generally what creates wealth in property, while your income and rent received is what pays for costs such as interest, council rates and property maintenance. In a nutshell, the higher your income and property’s rent, the more property you can hold and, in turn, the higher the likelihood of more capital growth.
It is best to choose lenders based on their borrowing capacity, particularly if you want to optimise returns and minimise risk. This does not mean you should over-extend by borrowing more than you can afford. The emphasis should always remain on safety.
Borrowing any amount of money comes with risks. Ensure you balance this risk by undertaking some simple, risk management techniques:
1. Keep a cash reserve
Create a cash buffer through personal savings or make extra repayments. This can help reduce the impact of unexpected changes to your financial situation.
2. Choose interest-only loans
Interest-only loans (compared to traditional principal and interest loans) means you pay less each month allowing you to hold more property for the same monthly cost. They also allow you to make a smaller payment if you need to while allowing you to pay more off the loan if you choose to.
3. Choose well-located, quality property
In short, the property with the best chance of performing better than others in a particular area is the one with a point of difference. It may be closer to geographical areas such as CBDs and beaches or close to local amenities such as schools, transport and shopping centres.
There is quite a science to identifying the best property within a geographical area. A specialised investment property buyer’s agent understands the fundamentals of the market and can take the emotion and guesswork out of finding the best property for you.
4. Hold it as long as you can…
Holding on to a property over the long-term is generally much more profitable than the ongoing sell and buy again approach. That is why it is best to hold your investment property for as long as you are financially and personally able.
5. Buy safely
Safety should always remain a priority when investing in property. As discussed, avoid over-extending and choose quality property in geographical areas that offer the best chance of high returns.
There are many methods of managing risk while still increasing returns from property. In next month’s Peninsula Living, we will focus on the more specific methods of managing risk from investment property.
Of course, we have only been able to scratch the surface on strategy with this article, but for additional advice, please contact a property investment adviser.