The big question

I often get asked if the first property should be bought as a home or an investment property. The short answer is – it depends. Nothing wrong with wanting to live in your own place if that is the objective. Yet, if the objective is to build an asset base that will contribute to your financial freedom – you may want to reconsider as getting the order wrong may set you back for years.

Personally, I am on the far side of this spectrum – I am happy to rent for as long as I can (I hope my wife is not reading this post). Putting the emotional aspect aside and using purely the financial reasoning, I will try to explain my take on this in details.

The difference

It all comes down to the fact that in Australia a principle place of residence and an investment property are classified very differently according to the ATO. Principle place of residence is an asset acquired for personal use, whereas an investment property is an income-producing asset. This means that an investment property shares many benefits available today for businesses, the most important one being able to claim tax deductible expenses known as negative gearing. This has been a heated debate and a buzz word recently as politician are trying to determine if this could be considered as an ‘unfair advantage’ for property investors.

Similarly to business – your investment property produces an income in a form of rent. It also incurs expenses such as depreciation, mortgage repayments, strata, water, council, maintenance and other fees. The difference between your income and expenses represents the amount you are left with in your pocket. If that amount is negative – you are losing money and hence can claim the tax deduction on the loss (i.e. negatively geared). If the amount is positive – you are making a profit (i.e. positively geared), hence the income tax is your new friend.

Most of the above is straightforward and widely known, so you may ask – how may it slow us down in building an asset base or property portfolio? The answer is simple – it costs you more to hold a principle place of residence compared to an investment property. You have less money left in your pocket on a monthly basis living in a property compared to renting it out.

I have to make multiple assumption that would be too many to list here, but to illustrate the concept, I suggest to consider the following example:

This must be personal 

I do need to mention that although the above data represents a real example, it should be considered for illustrative purposes only. You will find that rent, interest rate and any other fees or rates above change over time and personal circumstance of each one of us are different. This means that there is no one size that fits all and we always need to get a professional financial and taxation advice. Nevertheless, I hope the table conveys the concept clearly.

As with everything – it is never black and white since residing in the property has also it’s advantages such as being exempt from the capital gains tax. This could be important for some people, yet since I am not planning to sell any of my investment properties (ever) – I cannot see myself benefiting from it. In addition – you can only have one principal place of residence, but since I am building a property portfolio this yet again does not apply for me. The other important thing to keep in mind is that the properties that perform the best are not necessarily the properties you want to live in. I have explained my property investment strategy in the earlier post, hence the type of properties I like to invest in are not the type of properties I would like to live in.

The end result?

So what happens with the money that I get to save by renting the property out? I save it for the deposit for the next investment property. It helps me to get the second one sooner as whilst I am saving the investment property also grows in value. Later, when the time is right I can use both (my savings and the equity from the investment property) to fund the deposit for the next property. Now that I have two of them appreciating, they both help me to get the third and forth one and so on. And let me tell you – the benefit of getting in sooner is often underestimated. Delaying the purchase for couple of months can easily cost you thousands of dollars as the market does not wait for us. In addition, when banks work out your loan servicing capacity the owner occupier and investment properties are again calculated differently.

In a nutshell – when building a property portfolio my intention is to get the parent properties to spawn their amazing children as soon as possible. To achieve that I need to ensure that the way my properties are run is very lean and optimal. This is achieved by taking the full advantage of negative gearing, correct loan structures and what Albert Einstein calls the ‘eighth wonder of the world’!

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. ― Albert Einstein

Over time my view on buying property for living and renting has changed multiple times and now the cut is very clear. I chose to rent where I want to live and I chose to invest where it makes more financial sense.

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If you have a loan – I may be able to show you how to save thousands of dollars in the long run. If you are planning to get one – it could be the perfect time to consider your loan structure. Getting it right early can save money and buy time (a lot of it).

I am a bit of a perfectionist at times and when it comes to reducing waste – I am up for the challenge! One part of the puzzle when you start with property investment is to find the loan structure that works for you. In fact, for some reason I was fascinated by the experiment of how far I can actually push it. My intention was to find a lean way of running my finance and reduce the unnecessary waste such as bank fees, interest and other commissions.

Essentials

Like a good and simple cooking recipe, here is what it needs:

1. Interest only home loan – this is the loan account to deposit home loan repayments. The repayments can consist of principal and interest or interest only amounts, yet from the investment stand point I would like to assume that investors have opted in for interest only repayments.
2. Credit card – ideally you need a credit card that allows you to earn points. Usually those credit cards come with a dearer yearly price tag. Some financial institutions however offer it for free as part of the home loan package.
3. Offset account – this account is linked with the home loan account. All the funds kept in that account “offset” your home loan balance, hence you are only charged the interest on the difference. For example – if your loan was $500 000 and your offset account had $100 000 worth of funds in it, the interest would only be charged on $400 000. The great benefit of this account is that the account holder has access to the funds at any time, just like he/she would for the savings or cheque accounts.

Too simple you may think? Perhaps, but I believe this is the case when less is actually more!

Loan Structure

The following illustration will help you to understand the structure that I am about to explain.

Having the offset account is a central pillar of the above loan structure. This is the key to making your home loan structure efficient. Everything else on the diagram supports the offset account to increase its efficiency.

Since the offset account balance offsets the home loan balance the goal is to keep as much money in it as possible (unless you have a better use for it). Banks calculate the interest on a daily basis, hence every transaction in or out of the account makes a difference. The bottom line is – the sooner the money is deposited into your offset account the less interest you are charged.

To achieve the above – consolidating all income streams is a great solution. This may include salary, rental payments, dividends or any other type of income. If you are currently paying out your home loan (i.e. principal payments) you may want to consider switching to interest only loan. The principal repayments can be made to the offset account instead. This would identically reduce the loan amount the interest is charged on yet you retain the access to your funds.

The use of a credit card makes another important contribution to the overall picture. The benefit is that you get to use bank’s money whilst your money is offsetting the home loan. Most credit cards come with 55 days (check with your bank) interest free period. This means that you can make purchases and repay it later with no interest or penalty. To make it even more hassle-free, you can opt in for automatic monthly repayments in your internet banking.

I use my credit card literally everywhere I can now. I pay for shopping, bills, holidays and other needs and I never pay a cent in interest. It works even better if you have a credit card that awards you points for making purchases. Those points can be later converted into gift cards or cash. To summarise – I have received close to $1000 cash back this year for using my credit card and I have paid no interest on any of my purchases.

Bonus Tips

1. If you have a partner or a spouse you can nominate a secondary credit card holder. This will save you extra credit card annual fees.
2. Pay your bills only when they are due. This way you get to keep as much money as you can in your offset account for as long as you can.
3. Pay with the American Express credit card instead of Visa or Mastercard. I found that American Express gives you almost twice as many reward points.
4. Carrying cash in your pocket costs you money. Instead the money could be sitting in your offset account reducing your home loan interest repayments.

In my view the above loan structure is imperative for property investors as I worked out that it saves me around $5000 a year. If you add a long-term thinking and compounding magic – the difference could be enormous. If you are paying your loan out (i.e principal and interest repayments) – the above approach can save you years.

As with everything – this may not be a perfect setup for everyone as our individual circumstances are always different. Nevertheless, I hope there is a thing or two that you may find useful to improve your bottom line.

I wish you a very successful and happy investing!

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Have you ever wondered how your superannuation money is performing? Do you remember the last time you have checked your superannuation account balance? Would you like to control your investments and have more investment options? Can you buy property with super money? The reason I have asked those questions is because we do not naturally think about our retirement until it is very near. We tend to believe it is miles away and we have all the time in the world to prepare for it. The truth is that time works in our financial favour and the earlier we start thinking about our retirement the smoother we’ll find it.

I have asked a good friend of mine Shaun Rasulov from The SMSF Club to help us understand an alternative approach to financial planning and managing your retirement.

What is SMSF?

Self Managed Super Fund or SMSF has become a buzz word nowadays with more and more Australians deciding to take control over their super funds. SMSF has gained even more attention when the government passed the legislation that allows super funds to borrow money for purchasing a direct property. This piece of legislation has changed the superannuation landscape significantly, similar to how Uber has changed the taxi industry. Ultimately, what SMSF does is it allows you to manage your investment funds yourself. The Australian Taxation Office has a strict regulation framework with restrictions and laws that you need to adhere to.

According to the ATO, there are more than 30,000 SMSFs that are being set up in Australia every year.  One of the main reasons people I meet set up SMSFs is to acquire a residential property. This phenomenon can be explained by appreciating property values (Sydney and Melbourne) and below average performance of most super funds. Also, most people understand property and believe it to be a safer asset class that goes up in value at a greater rate compared to their assets managed by retail/industry super funds. This has resulted in SMSF sector accounting for one-third of the total superannuation pool of over 2 trillion dollars.

Benefits of SMSF

SMSF is a type of trust that combines the features and benefits of a super fund with a trust. Those benefits include (as per the rules at 07/02/2017):

• Tax benefits, such as tax-free income generated from within the super fund in retirement
• The asset is not subject to a Capital Gains Tax when sold in retirement
• Ability for up to 4 people to combine their super fund balances to increase leverage
• A greater flexibility around tailor making Estate Planning
• Assets within SMSF (super) environment is safeguarded from bankruptcy
• Much greater investment options than retail/industry super funds

Investment options

When deciding on your investment options with SMSF, the list is extensive. Some examples are:

• Direct shares
• Bonds
• Listed Investments Companies
• Exchange traded funds
• Mutual Funds
• High-yielding cash accounts, including term deposits
• Direct property
• Unlisted assets, such as shares in a private company
• International markets
• Collectables
• Other income investments

I recently read that one Australian has purchased a pride of lions in Africa using his superannuation funds, which is a legitimate investment. I am not convinced that it is a sound investment, but it shows you the level of flexibility that SMSF offers. Overall, SMSF opens a door to much greater investment options and flexibility around how you can invest your superannuation money.

There are responsibilities and rules around managing SMSF that anyone thinking about taking control over their super funds needs to consider. It is imperative to align yourself with a professional within the area, who can help you navigate through the complexities and regulations surrounding this space. For example, I am often asked if you can purchase a residential property within SMSF and live in it after retirement, and the answer is no. Your investment always has to serve for the sole purposes of providing an income in your retirement.

How much money do I need my SMSF to have to buy a property?

I also get questions on the funds required to be able to purchase a residential property within SMSF. The answer depends on the value of a property one is looking to buy. For instance – if you intended to purchase a $500,000 property, as a bare minimum, you would need to have funds for a 20% deposit (provided a bank borrows you 80%) and all the relevant fees. Those fees include legal, stamp duty, solicitor fees, Bare Trust fees, bank establishment fees, etc. Given the example, you would need to have around $140-150,000 within your super fund to make a purchase. As previously mentioned, many people choose to combine their super funds, thus giving a greater economies of scale.

Managing your investments through SMSF can make a great difference when you retire. As good as it sounds, this approach is not for everyone and before you decide I encourage you to seek financial advise from a qualified professional. You need to make sure that setting up SMSF would work for your financial and personal circumstances. Employing an investment strategy and having it tailored for your personal needs is paramount.

I wish you a very successful and happy investing!

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Have you thought of the things that hold people back from investing in property and achieving great results? Why is that many people have the means to invest, but never do it? If you have read the post on how my property investment journey started you may have noticed that when I made a decision to go ahead with property investment I had people around me with all the reasons in the world why I should not do it.

The obvious difference between the successes of some people and the perception of others made me puzzled at first and wanting answers later. I have written a post highlighting the things that set the successful property investors apart as I was hungry to know the secret sauce recipe. Understanding the behaviours of successful people was crucial for me, yet understanding the other side of the coin is just as important. Below I have listed 6 common reasons that hold some of us back from making the move.

Fear of failure

I believe that this limiting belief originates from the lack of confidence in our own abilities. We tend to think that we are not capable of making the right decision that would give us the result we want. Some of us fear being ridiculed for making a bad decision and that on its own is sufficient to never even consider making a decision.

We doubt our abilities as most of the information around us is negative. We have been told for as long as the television is around that the property bubble in Australia is about to burst. Our neighbour perhaps told us a horror story about someone he knows who invested in mining towns of WA or QLD and went broke. The list goes on.

Whatever we fear, it is likely to have its roots deep down in our past. We have to find courage to accept it, get over it and leave it where it came from. If we still find it challenging there are other ways around it. One option is to start small and build your confidence as you go, you will eventually see that there is nothing to fear. Another option is to get a great buyer’s agent by your side. This should help you to remove stress, fear and the feeling of uncertainty.

I am not good enough

I am not smart or talented enough. Property investment is complicated. I do not know enough about it or how to do it.

The truth is that people like to come up with excuses as it makes us feel justified. In reality, you do not need to be smart, talented or special in any way to invest in property. Property investment is actually simple, but it is not easy. I know people from all sorts of backgrounds, cultures and income levels that have managed to succeed with property investment. It is definitely accessible to a lot more people than have currently adopted it as a vehicle for their financial success.

To overcome this limiting belief I suggest to:

1. Start with a good property investment book (see the Resources section) and get comfortable with general property investment concepts.
2. Start listening to a great podcast that host some of the most successful property investors in Australia – Real Estate Talk
3. Surround yourself with a team of experts that will guide you through the process (including a great buyer’s agent)
4. Go and get it!

Investing is risky

This is probably the most common reason the people feel comfortable voicing. The usual concern is that we can lose money on our investments, hence property investing is inherently risky. That is right, but so is taking a plane, driving a car, playing football and many other things we are doing day-to-day. I really get it, I am scared of loosing money too. In fact, I do not know anyone who is not.

If you are not willing to risk the unusual, you will have to settle for the ordinary.” – Jim Rohn

We need to accept risks in our lives and learn how to deal with it. After all it is part and parcel of living. The good news is that those risks can be greatly reduced by following a proven investment strategy and surrounding yourself with a great team that you can rely on

Complacency

We are fortunate enough to live in one of the wealthiest countries in the world. This is definitely a great privilege as it represents an abundance of opportunities and ways to succeed in life. The grain of salt it comes with is a certain level of comfort which stops some of us from pushing ourselves forward. We get used to an easy, comfortable and secure lifestyle and any change seems like a disruption. The absence of a strong reason or a need to get out of our comfort zone puts a cap on our financial and personal development.

Complacency is dangerous and a difficult one to cure. It first of all requires that we recognise it and accept it, which is the hardest part I think. Since it originally comes from some level of success that we have experienced in the past I suggest you celebrate it and then put it to the side for good. This should give you room for getting clear on your purpose and setting new goals. Commit to the goals with an excitement to achieve them and get your other half to push you and remind you of your ‘why’ every time you fall back on your comfortable habits again. Getting the support from your spouse provide amazing levels of energy to last you a long run!

Property investment is only for the rich

There is a common misconception that buying property these days is beyond the reach for some of us. Whilst I do not want to say that buying real estate is cheap, it is definitely more attainable than most of us think it is. There are number of stories of guys and girls in their 20s buying real estate, so if they can do it – so can you. I know a librarian who owns 4 properties in Sydney, not bad right? It is not about how much you make, it is about what you do with the money you make. This almost sounds too simple to be true, yet it is!

Financial discipline is absolutely paramount in achieving great results. I have come across the ‘Pay yourself first‘ concept when I read the Rich Dad Poor Dad book written by Robert T. Kiyoshi. This approach may seem counter intuitive at first, but it really works wonders if you stick to it.

Disagreements with your spouse

Property investment is a big decision and requires you to be on the same page with your spouse. This can be tricky if your risk tolerance, comfort levels and life priorities are different.

Given that you share the same goal(s) in life, you should be able to smooth out all the disagreements by simply having an open conversation about the ways to go forward. You need to jointly come up with a plan and once you do – stick to it and support each other on the way.

I wish you a very successful and happy investing!

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Have you ever wondered which property investment strategy you should employ to start building your property portfolio? Which one would give you the best result and produce the biggest return on investment?

The truth is, there are multiple ways to become successful with property investment and below I will describe one of them. Overall, it comes down to your personal and financial circumstances. Finding the strategy that works for you may take time but it is time well spent. Once you found your best fit stick to it and keep improving it every time you have a chance to exercise it. This is important as we all like to experiment from time to time, yet the success comes from mastering one thing and becoming great at it. Before I share the property investment strategy that I have adopted, here are some of the common ones you may have come across:

   1. Buy and hold

   2. Buy, renovate and sell (also known as flipping)

   3. Off-the-plan

   4. Passive property development

   5. Active property development

   6. Holiday home

   7. Defence housing

   8. Crowdfunding

Out of the above lot, the only two that I would ever consider for myself are ‘buy and hold’ and property development. Crowdfunding could be interesting, but I just don’t know enough about it to have an opinion and I like to fully own the asset. There are definitely people out there who took on other strategies successfully, yet I find them to carry an unnecessary risk that I prefer to avoid.

I am a big advocate of the ‘buy and hold’ property investment strategy since I truly believe it to be the best way to build long-term wealth for most of us. I would even call it ‘buy and never sell’, yet things happen and it may not always be possible, but having this intent is important. To make this strategy work wonders your investment property must adhere to one simple rule – it must appreciate in value. This is the basis of ‘buy and hold’ approach, hence whenever I consider adding a property to my portfolio the very first thing I ask is – will it grow ? In fact it is a little bit more than that, I want the property to not only grow, but grow at a pace that would outperform the market average and put me ahead of the game. So how can you find that rare gem?

Below are some of the factors I like to consider to get an overall feel for the performance potential of the investment property. The list does not contain everything that contributes to the property growth but should give you a good idea of the overall picture.

Location, location, location (must)

This probably is the most important thing to get right as part of your property investment strategy. This one decision itself will underpin most of your capital grown for years to come. My rule here is pretty simple, ideally I would like to see all of the below items ticked:

• I prefer middle ring suburbs located from 5 km to 15 km from the CBD.  In my view this is where most of us would like to live, hence I expect those suburbs to continue to be in strong demand.
• Sydney, Melbourne and Brisbane are the only places for me to invest. I am actually slowly shifting my preference towards Sydney and Melbourne only because according to the The Australia Institute report Sydney and Melbourne are expected to experience the greatest population growth over the next 40 years. Since property investment is a long-term game for me, I am happy to wait in order to reap the bigger benefits later.
• Although past is not future, I like using historical performance data to back up my research. Suburbs with historically strong demand usually carry their performance into the future. You can check the Resource section of my blog for the tools that would help you to get access to the suburb’s historical data.
• Ease of access to amenities is very important. Amenities to consider are public transport, shops, restaurants, attractions, schools, parks and other public facilities. I like using Walkscore application as it rates the property on how ‘walkable’ it is and gives it a score. Feel free to check it out here.
• Avoid suburbs with above average crime rates and below average income growth.

Established stock (must)

There is an old debate in the property investment world on whether you should invest in new or established dwellings. My personal preference is buying an established stock for many reasons, such as renovation potential, buying on true market value and most importantly – what I see is what I get. I did however try investing in the new stock, but fortunately enough I have managed to get out of it without too much damage. I personally know people who have experienced a much bigger pain with their off-the-plan purchase.

Looking back now, my off-the-plan deal was actually not that bad. I have researched the agent, the builder, I have done my due diligence and I was happy with my findings. The problem was that whilst we were waiting for the construction to complete my wife got pregnant and went on the maternity leave which has reduced our income and hence the borrowing capacity. On top of that the banks have changed their lending policies which made getting the loan even harder. All of a sudden we were running a chance of not getting the loan and loosing our deposit.

I am not saying that buying new property is a bad idea, I just figured out that it has more risk than I want to bear. There are many people who have made fortunes with it, yet for me the approach of ‘slow but steady wins the race‘ is more favourable.

Fit for the demographic (must)

Should you first decide which type of property (e.g. unit, town house, house) to buy or where to buy? This may come counter intuitive but the trick is to figure out the suburb that would get you the best appreciation (based on your budget) and then buy the type of property that fits the suburb demographics. For example – if you have decided to buy an investment property in Randwick, NSW then according to the Census data 67% of dwellings are units.  In terms of the bedroom breakdown it looks like this:

So based on the above data it makes sense to consider a 2 bedroom unit as that represents the most typical dwelling type for the suburb.

Strong rental demand (must)

When picking a suburb, you want to ensure that the law of supply and demand works in your favour. There are two great metrics to consider for that purpose – vacancy and rental listing rates. Vacancy rates of 3% and lower are considered to indicate a high demand and low supply in the area. As for the rental listing rates you want to have at least 30% of local residents renting (versus owner occupiers) as that is a great indication of a healthy stream of renters in the suburb.

Timing the market (optional)

I am a great believer that there is never a bad time to buy an investment grade property. The way I look at it is that there are good times and there are great times. Great times are the ones when you buy the property just before it starts to experience a rapid growth. Good times are all the other times. There are ways to ‘predict’ the suburb growth since it is usually caused by one of the following reasons:

– Suburb is due for growth as it reached a respective stage in the property cycle

– Suburb is going through a gentrification stage

– Ripple effect caused by the neighbour suburbs’ growth

Something special (optional)

Buyers and renters are always happy to pay a little bit more if the property has something unique about it. This could be a well though out floor plan, great view, bigger balcony, lock up garage, extra off street parking, study room, good school catchment and many other things.

Potential to add value (optional)

Buying a property with renovation potential is a great way to quickly increase the intrinsic value of the property and rental return. What ultimately happens, given that the renovation is done right and you do not overcapitalise, is that for every dollar spent you should get $2 or $3 back. This creates equity in your property that you can then access through refinance.

I have added value to my very first investment property using renovation where I have managed to get 4 times return on investment. This can be very powerful and boost your property investment portfolio building dramatically.

Infrastructure development (optional)

Another way to position yourself for the above average capital growth is to pick a suburb that has infrastructure development plans. This could be anything from a train station, shopping centre to a hospital or a school. Anything that would make the suburb more livable and ‘walkable’ would eventually have a knock-on effect on the property value. If you ever wondered what developments are planned for your suburb, you can always approach your local council for information.

To conclude, – this article covers only some of the main aspects of the ‘buy and hold’ property investment strategy. All of the above is my personal opinion which is purely based on my personal experience. It by no means covers everything, but rather intends to give you a good starting point for further research and exploration.

I wish you successful and happy investing!

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If you have considered or bought an investment property in the past, chances are that you have also considered employing a buyer’s agent. This arguable question often sparks up a debate, as people tend to have strongly opinions on this topic. Should you engage the buyer’s agent to find your next investment property gem or could you do it yourself? I have summarised the main points for your consideration in this article.

Perhaps you were also wondering who actually the buyer’s agent is and what services do they offer? In short, – it is someone who works in the complete and unbiased interest of the buyer. This includes making sure that the property fits your personal and financial circumstances the best way possible and in most cases negotiate the contract and the sales price.

Here are the main things to consider before deciding to employ the buyer’s agent or not:

Cost

Buyer’s agents are not cheap. They do not have a standard rate as it really depends on the buyer’s agent itself and the scope of the service you would like them to provide. Typically, you can either engage the buyer’s agent to lead you through the complete process or get them only to negotiate the contract conditions and a sales price for you (which may require bidding at auction). Engaging the buyer’s agent for the full service would cost you from 2% to 2.5% of the purchase price. This means that for a $800k property you would need to cater for an additional expense of around $16k to $20. Some buyer’s agent however prefer to charge a flat fee which is typically between $10k and $20k.

Important thing to note about the buyer’s agent commission is that you cannot claim a tax deduction on it, see ATO for more details. However, if you do decide to sell your property in the future, it will offset your capital gains for the purpose of capital gains calculation.

Peace of mind

With the professional buyer’s agent by your side you are removing all sorts of stress from the overall process. You should feel reassured having a professional acting on your behalf who provides you with impartial and personalised advice. This was definitely an important aspect for me when I started my property investment journey. I was afraid of making a mistake as I knew that getting my first property wrong could set me back for years.

Property due diligence

Buying an investment grade property usually requires an extensive amount of research. This step is crucial, as it determines whether the property is an opportunity or a lemon. As part of your research you may want to consider the following items and you would like to tick as many of them as possible:

1. Purchase the property below market value
2. Ensure the property has promising capital growth potential
3. There are planned infrastructure developments that would benefit the property
4. The property has renovation potential
5. The type of property fits the demographics of the area
6. The demand in the area exceeds the supply, vacancy rates are low
7. Strata’s financial and other matters appear to be in order
8. And much more…

Most of the above information is freely available (see the Resource section of the website), yet some reports that the buyer’s agents cost money. There are multiple property data providers such as RP Data, Residex, APM and PriceFinder that offer such services. The research process may be overwhelming as you need to be able to gather and collate all the information into a complete picture before moving further with it. Do you see yourself doing this research? How confident are you in your research outcome? If you believe that you can do it, it is great because you really can. Getting the basics right is not a rocket science, yet there will always be some smaller nuances that data will not tell you but the extensive day-to-day experience in the field will.

1% difference in growth over 30 years

Overall, I think most people would agree that the professional buyer’s agent run a better chance of getting things right. But how better do they need to get it before you can justify the cost of their service? Is 1% of additional appreciation per year a good justification? To demonstrate the power of an additional percent of growth, see the below chart that compares 6% and 7% average growth over the period of 30 years..

As the graph suggests, – the projected value difference over the 30 year period exceeds a million dollars. This is a significant amount by anyone’s measure. To conclude, – if you are convinced that employing a buyer’s agent would give you at least the slightest advantage in terms of the capital growth over the long-term, the buyer’s agent commission could be more than justified.

Negotiations

Using the buyer’s agent to run your negotiations is probably the most common reason for their engagement. Not everyone feels comfortable to negotiate the price with the selling agent. After all, their job is to sell the property at a highest price possible as he or she is representing the interests of the vendor, which are opposite to yours. Good selling agents are trained and skilled to get as much money out of you as they can. They use numerous techniques and apply them without you even knowing it. For an experienced and skilled buyer’s agent this is the opportunity to shine and demonstrate the value of their service.

It is important to note that property investment should not be an emotional roller coaster but rather a numbers game. I have seen number of times when the buyer’s rational thinking gives way to emotions and personal attachment for the property. This is where the numbers stop staking up and you are no longer playing the game you should be playing. Buyer’s agents are emotionless and have no personal attachment to any property they purchase. This should trust them to remain rational and objective throughout the complete negotiation process.

During a negotiation, it would be wise not to take anything personally. If you leave personalities out of it, you will be able to see opportunities more objectively. – Brian Koslow

Networking and connections

You can up-skill yourself on almost any of the above points and become highly competent at it, yet one area where you would struggle to match the buyer’s agent is their network. This is something that takes years to build. Unless you are doing it full-time you will find it extremely difficult to put in place and maintain. In my experience, this could be the single lever that produces an n-time return on buyer’s agent commission.

Buyer’s agents are always on the ground day-to-day building relationships with selling agents. The moment a great investment property becomes available, the buyer’s agents are the first ones to know of it. Off-market opportunities are not uncommon. The selling agents (representing the vendor) sometimes need to cater for vendor’s requests to make a quick or a quite sale. This means that you may never see the property being advertised on the market and hence never run a chance of bidding for it.

To summarise, – I understand that employing a buyer’s agent comes with a hefty price tag, but in my view the advantages outweigh the cost by quite a margin. Based on my experience, – the good buyer’s agent makes the process structured and consistent making the results more predictable and secure. Having a professional buyer’s agent by your side helps you to remain emotionless and rational throughout the process, so that you can keep playing the only game that matters in property investment, – the numbers game.

I wish you a very successful and happy investing!

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In the earlier post we spoke about how many property investors there are in Australia and how many properties they own. The most important highlights that we should take away from that statistic is that over 70% of property investors never make it past their first property and that less than 1% of property investors own 6 or more properties. You may wonder why there is such an abyss between those two groups of property investors? Why is that both groups are buying real estate but their results are poles apart? How property investors are different? What makes a successful property investor and what should you know to increase your chances of getting into the 1% of property investors?

There are many reasons that set the successful property investors apart, yet I would like to cover only a handful that make the biggest difference in my experience.

Reason 1: They build a team around themselves

Have you considered finding, purchasing, managing, renovating or perhaps doing tax returns for the property yourself? I am a strong believer that we should only be doing things that give us the greatest return and outsource everything else. The reason is simple, – we only have 2 hands, 24 hours in a day and we need to spend it wisely, so I suggest that we put it to the best use we can. If you want to be successful you need to surround yourself with people who are smarter and more experienced (in their niche) than you are. Once you have the team, you need to let things go and put trust in others.

I have been asked multiple times if I have seen (in person) or inspected our properties before they were purchased. It is fascinating to see the people’s reaction when I say – ‘not a single one’. I have simply found people who I can trust to deliver consistent result every time.

There is a great saying that I truly believe in:

If you’re the smartest person in the room, you’re in the wrong room.” – Unknown

Reason 2:  They make decisions and take action

This may come as the most obvious reason of the lot, yet many of us find reasons not to take action and keep procrastinating hoping that things would change one day. Things do not change unless we change them and to achieve that we need to make decisions and take action. If you have made a decision but haven’t followed it though with an action, it is no different to not making a decision at all.

This is the most obvious and yet the most common anchor that is holding many of us back. This is a single biggest reason successful property investors are different. Being an action taker is not really property investment specific as it affects all the areas of our lives. If there was one reason I had to choose to top my list of traits of successful people this would be right up there, with no competition whatsoever.

Reason 3: They have a system that works

There are number of strategies that could make your property investment journey fruitful and I will share the strategy that I use in one of my later posts. The trick is to find the strategy that works for your personal circumstances and stick to it despite all the noise and distractions. The beautiful thing is that you do not need to come up with the strategy yourself as there are many smart people out there that have paved the way for you already. All you need to do is to find someone who has done it successfully before and replicate the process over and over again. This may sound boring, but the truth is that property investment should not be exciting and you should not feel the need to experiment or speculate. What you need is a system that makes your investment results more predictable and consistent.

Reason 4: They never stop learning

We usually stop actively learning when we become comfortable with our life or when we achieve the results we aimed for. For instance, it happens mostly post university graduation or when we get the job that we always wanted. Have you considered where would you be today if you had decided to keep the momentum and your learning pace after achieving those goals?

Warren Buffett is a great example that I admire to read and learn from. He started his investing career by reading up to 1000 pages a day. Even now, he spends most of his day reading. I am not suggesting anything as radical, yet the importance of self-education cannot be underestimated.

In addition, successful investors do not believe in failing, every experience is a chance to learn, this is how they grow and progress.

The only real mistake is the one from which we learn nothing.” – Henry Ford

Reason 5: They have a different mindset

I know that this reason is pretty broad and there are many things that contribute to your mindset, yet some stand out more than others.

For example, successful property investors are big picture thinkers. They are playing a long-term game and are not overly concerned with the intermediate market movements or quick wins.

They take the full accountability for their life and refuse to believe that external circumstances or luck are creating the life for them. Instead, they create circumstances that work for them so that they can have the life that they want.

They understand the power of leverage and that in order to create a substantial asset base they must borrow considerable amounts of money. This is done pragmatically, with having all the necessary risk mitigation strategies and buffers in place.

They prioritise capital growth over cash flow. Do not get me wrong, I believe that cash flow is important as it keeps you in the game, yet it is the capital growth that makes you wealthy.

And lastly, – they treat property investment as a business. This means that all the rules that you would normally apply to running your own business must also apply to property. At the end of the day the ultimate objective of investing in property is to improve your financial position, so we need to stay focused and never lose sight of it.

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I understand that deciding to embark on property investment journey may be difficult, cumbersome, overwhelming and may require courage. The whole end to end process may seem at first too complicated and uncertain. I know, I have been through this myself. My aim is to help you start your property investment journey. I want to share with you my experience and the experiences of many other successful property investors that I am lucky enough to know and learn from.

There are many ways you can start your property investment journey and given that you adhere to the simple property investment principles I am more than certain that you will succeed. I would like to share with you my story, the steps and decisions that I took along the way. It has worked for me and it can work for you too, so let me share it with you…

Additional Source of Income

I do not remember how I got to the point where I realised that having only a day-to-day job to support me and later my family was not enough. I actually believe it was never a question for me but rather a statement that I never questioned. There are plenty of reasons to justify the need for the additional source of income. For anyone who needs convincing here are a couple of them:

Single Point of Failure

Not having any other sources of income makes you a single point of failure. What would happen if for whatever reason you are not able to go to work tomorrow? I think your family would be up for some heavy and unpleasant decision-making to go through pretty soon.

Retirement

How often do you think about your retirement? When was the last time you’ve checked the balance of your super? How are you planning to support yourself when you retire? Is living on a government pension an acceptable option? Would the pension support the lifestyle that you want to have? For some reason we tend to think very little about retirement. Some of us struggle to plan a year or two ahead, let alone the retirement. The bottom line is, – the reality will kick in one day for all of us and we will have to face the retirement. The sooner you start building for it, the better lifestyle you will end up having.

Stress Reduction

Does fear of debt make you stressed or does the total dependency on your 9 to 5 job stresses you more? The answer to this question really depends on your personal circumstances, but contrary to many people’s beliefs ‘good’ debt actually reduces stress, anxiety, uncertainty and concerns about the future. You just need work with your mindset if you are on the risk averse side of thinking.

Options in Life

Do you want to have more options in life? I definitely do. I do not yet know when and how would I use those options, but simply having them gives me the piece of mind.

The list can go on as there are many more out there. For me, any one of the reasons above on its own was convincing enough.

Property or Shares?

Next I started to research the types of passive incomes available. Cutting the long story short, at the end I only had to decide between shares and property. Given that the historical performance of shares and property is comparable I have decided to focus on property. This was purely due to the fact that I wanted to leverage the bank’s money. You can do that with shares too, but nowhere close to the same extent as with property.

The quick example below compares shares and property performance over past 10 and 20 years. According to the chart below, Australian residential property price growth is comparable with the stock market performance over the long-term. Yes, if you look at the 10 year time frame, the shares have done better than property, yet if you look at the last 20 years you will find that residential property has outperformed shares slightly.

Source: Australian Stock Exchange and Russell Investments

So here I was, with the property investment as my chosen tool to my future life I wanted to build. I went on a book buying and seminar spree to understand how it all works and what makes a good property investment. The information that you get from the books is usually full of theory and often lacks practical guidance. I remember being very selective when choosing the author of the book as I wanted someone to back it up with evidence, someone who has been there and done it, not once but multiple times, across multiple property cycles, for decades and still stayed in the game.

You can find the books that I found the most influential in the Resource section of this blog. I will definitely keep that section updated as I read more.

Sharing the Excitement

After over-saturating myself with the information, data, practical steps and real success stories I started to share my excitement with the world. I was quite frankly and quite quickly shocked with what I was getting on the other side of the fence (do not go there). Have you ever shared with others your investment thoughts on property or shares? What was their reaction? I found that most of the time you would get dozens of reasons NOT to invest and the risks you expose yourself to. This is almost natural, as we tend to think about the risks first and not the opportunities.

I have later realised that my shock had a lot to do with the fact that I have approached the people searching to validate my learning, but in return I was getting exactly the opposite. I have also learned that there is no shortage of opinions and everyone seems to always have something to say on property investment. The interesting thing is that the people with the least knowledge and experience can often have the strongest opinions and can sound so convincing that I have almost fell for it myself.

Are All Property Investors The Same?

After a short period of uncertainty and discouragement I managed to pull myself back together and asked, – If what people are saying is true, then how did the other guys that I have watched and read about managed to get it right? I got quickly back into the positive mood (almost as quickly as I got discouraged before) and set myself a mission to understand why there is such a disconnect between what I read, watch and what other I hear from other people. What I have eventually gathered was pretty fascinating, raising a lot of questions and definitely has a lot to offer in terms of food for thought. I have discovered that only 7.9% of Australians or 1,764,924 people owned an investment property, yet that is not the most interesting bit, the breakdown is by far more catchy:

Source: ABS, RP Data and Census

To summarise the table above – out of all the people who owned an investment property 72.8% owned only one while just 0.9% owned 6 or more. I need to emphasise the last point, – out of the 1.7 million people who had ever invested in property, less than one percent of those own 6 or more properties. That is only 0.9% of investors and 0.068% of Australians. This equates to 680 people out of 1 million (given the Australian population of 22,34 million in 2011). Or simply – just over 15000 people in the country.

We have to leave a bit of room here as the data collected from Census, ATO and RP Data goes back to 2011. Now that the new Census has recently been conducted we should expect new numbers, so once it becomes available I will definitely do another post to analyse the trends.

What is Next?

So my only question once I have completed analysing the data was, – what do those 15000 people know or do differently to everyone else? How did they manage to do it and why not many others can do the same? Is it just luck? I thought perhaps they knew a secret about how to grow a property investment portfolio that no one else knew? Understanding the differences between the super successful property investors and not so much was the next stage of my property investment journey that I have decided to embark on. I will cover my findings in details in the next post, so please stay tuned for more!

I wish you a very successful and happy investing!

P.S. If you found this post helpful, please share it with your friends by clicking on one of the social share buttons below? I appreciate your support with helping me to reach more people, thank you!