Sometimes property investment is not all fun and games, and sometimes we just get caught up in the whole status thing of owning property without seeing the big picture – it’s an investment strategy.
Now I have to confess, I’ve not been immune from the buzz that comes from purchasing a property, that feeling when you have an offer accepted and the property settles, a bit like an investaholic. The problem is that once you have settled on a property, the expenses start to roll in. I have to admit it, I hate seeing the rates notices drop into the letterbox every quarter. They, along with the water rates and the monthly insurance deductions, gobble up a huge chunk of the rental income. Add in repairs and maintenance, requests for improvements from tenants, land tax, agents fees and tenants who don’t pay. You know, sometimes the returns you can earn from managed funds look so much better. So why do we put ourselves through this pain? Because when it works out, when you get the investment right it pays off big time.
Remember the key word in any property investment is the word ‘investment’.
Any purchasing decision should be made wearing your ‘investment’ hat only. What do I mean by that? Well, as a business mentor once pointed out to me, what is the use of owning a property if it doesn’t provide cash flow or improve your overall position in the short to medium term. You want to enjoy your life, not be slogging away to pay for a roof over someone else’s head at the expense of your own family. I have learnt that the hard way.
A few years ago we purchased a couple of properties in a low socio-economic area of the country. These were in an area that I thought would ultimately improve (and I’m sure they will sometime in the next 10 years), they also had potential to be developed which was something we were focussing on at the time. Unfortunately, we ran into the GFC, stagnant rents, a couple of tenants who have been poor payers, unforeseen repairs and maintenance – some due to tenant damage and, to top it off, the market has fallen slightly in that area. Since the purchase, we’ve also had a change of heart on the development/renovation side of things, it just doesn’t make sense for us to take time off to develop property when we have other priorities. After talking it through with our accountant, we decided to sell these white elephants. Yes, the market will move upward eventually, but we will potentially lose money anyway by holding for another couple of years. So how can you learn from my mistakes?
How to Minimise the Chance of Loss
- Have a plan and stick to it. By this I mean create an investment plan. Know what your risk profile is and what you are aiming to achieve. For example, we decided a number of years ago that purchasing ‘three bedroom – little brick boxes’ was our best strategy, funnily enough, it is only when we deviated from this that we came undone in our investment journey.
- Make sure you have a clear idea of why you are buying, what this property will do for your portfolio and how you will service the debt and expenses. A property that doesn’t match your plan has no purpose in your portfolio. Ask yourself ‘is this an investment I would recommend to my best friend? If it isn’t, be your own best friend and walk away’
- Find a property mentor or a support group who can give you some advice. I have been a member of Property Women here in Australia and the networking provided by this group has enabled me to understand the property investment market so much better. An investment buddy may also help; you can use them to review any potential investment free from any emotional attachment.
- Don’t get caught up in the emotion of purchasing a property. It’s an investment and any investment should provide a good reward. If it doesn’t match what you can make by putting your money into a managed fund then you should consider whether you are really investing, or just taking a gamble. If it’s the latter, a Lotto ticket is a much cheaper way to speculate.
I’m not saying don’t invest. Property investment has helped us to send our kids on student exchanges, allowed us to travel overseas and will support us in our retirement years. I’m just pointing out what my business mentor pointed out to me: any investment has to be able to withstand full financial scrutiny. You should be able to clearly identify where the return is on your investment of time or money, if you can’t see it, then it’s not an investment.
And if you have a white-elephant like we do – consider whether this is the year you should jettison it and move on. After all, we want this coming year to be a great one.
What about you, have you caught yourself being an investaholic at times?
How do you overcome this?