How many Investment Properties do you need?
Ok, that’s not true, but it would be good if there was a definitive answer like that wouldn’t it?
Investment properties are one of the best ways to build long term wealth in Australia with leverage (borrowed money).
The concept is easy to understand. Borrow money from the bank, buy a property, rent it out to someone else who pays you an income. Over time you pay down the loan and hopefully the property value rises.
The long-term goal being that you earn money in 2 ways from the investment: Rent and property value increases. Win/Win. We believe that investment properties can be part of most people’s longer term wealth building strategy, but the question is, how many do you actually need?
Everyone has an opinion on this, just ask your neighbour and your uncle and the barista who makes your coffee. They will all have one, whether they have personally invested in property or not. One of the theories we have come across is “the more the better”. It’s a numbers game, get as many properties as you can. There are several flaws with this strategy, but probably the biggest one is that you are focusing on getting a lot of properties and less on the quality of the property itself. I understand that the concept of several properties sounds really appealing and in some regards you are also addressing a major investing goal, which is diversification, but more is not always better.
We believe in quality over quantity.
What you need to think of when investing in property
Property investment is COMPLETELY different to buying a house to live in. Often when you are buying a house to live in, you want ‘a great deal’. The less you pay for the thing you want is great. When it comes to investing however, you need to think less about the ‘deal’, and more about whether the property is a good investment. And by good investment, you need to consider the following things:
What income does this property provide and what is that value relative to the value of the house. When you work that out, it’s called the rental yield. Example: you buy a house valued at $800,000 and it is rented out for $800 pw. Yearly income is $41,600 so the rental yield is 5.2% pa ($41,600/$800,000). This is the gross yield (before costs and fees have been associated, but it’s the starting point for understanding the return you are receiving on the property from income.)
Who is your ideal tenant, and would they want to live there?
Based on the location of your property, you can get an understanding of who your target tenant would be. So often we talk to people who buy investment properties in places that they themselves wouldn’t dream of living in, but have no consideration for who would actually want to live there.
Ask yourself this question: If you don’t want to live there, what makes you think others would want to?
The aim of the investment property is to rent it out, so you want to understand who that would be to. Is it a home in a suburb, close to schools and public transport? Then you might be renting it out to young families. Is the property a 2-bedroom apartment close to the city? Then you might be renting it out to a couple with no kids. Understand your market and consider whether they actually want to live there.
As an example, for a young professional couple who work in the city, they probably want to live close to the city. So maybe an apartment 40 kms away from the CBD doesn’t suit those potential tenants. See what I’m saying?
What are your ongoing costs?
Now that you have an investment property, you are also responsible for the upkeep. You will have the loan repayments, but you also need to ensure you are covering the costs, which include insurances, maintenance and body corporate. If you have a unit or townhouse investment, you will likely have higher costs because you have to cover body corporate fees. You need to assess these fees relatively to the income to determine whether the investment is going to cost you money or earn you money.
On top of the usual running costs, you also need to consider the age and the condition of the property. Do things need repairing or replacing soon? When is the last time the dishwasher was replaced? What is outlined in the building and pest inspection that may cost you money in the future? You need to start viewing all of these potential issues as costs that may impact how your investment is performing.
Ideally you want an investment that has lower costs meaning you maximise your actual return on it. Often people buy homes to live in that need a little TLC, but because they are happy to do it themselves, the cost is lower. You don’t really have that luxury in rental properties, as when something breaks, it’s your responsibility to fix it asap.
This is another example of looking at property in a completely different way to the way of assessing a home.
Do you have some wiggle room with personal cashflow?
If there is one thing that has been evident over the last 12 months, it’s that things change. Interest rates are the highest they have been in a while, which means the same investment property is costing you more. For a lot of people with investment properties that used to break even, we are finding that they need to dip into their own pockets to cover the shortfall. If you don’t have any excess money in your cashflow or budget now, then maybe you are looking at an investment property that is not in the price point that is appropriate for your personal situation. When you invest in property, you want it to be for the long term, so you want to know you can weather the storms in the short term financially, for the longer term benefit.
Buying and selling property is an expensive exercise, so you don’t want to be doing this regularly, and you certainly don’t want to have to fire sale an investment property because you can’t keep up with the repayments.
So you don’t need 4, 7 or even 2 investment properties. A lot can be achieved with 1 quality investment property, but the important thing is to choose the right investment property. Start with one and answer the above questions. Look at it objectively as an investment, and not as a “good deal”. The whole aim of investing is to make money from it over the long term. Contrary to popular belief, not all properties provide that as an investment. It’s not a guarantee that your property will make you money, which is why you need to get smart about choosing the right one.
Instead of asking yourself how many do I need, ask yourself ‘is this a good investment”? Quality over quantity is definitely the best play because you don’t need a large number of investment properties to get ahead.
If you want to know how property can play a part in your overall financial plan and wealth building, feel free to reach out.