8 Golden Rules of Property Investing

In his latest book, Michael Yardney reveals his eight golden rules for property investing.

Here we summarise those rules, and show you how financial, tax and legal systems can be set up for success. It doesn’t take a lot of capital to get going in property. You could start with your home and, as its value grows, you can borrow against this increased equity to purchase a second property. This property can be afforded with help from the tenant and the tax man.

1. Invest, don’t speculate

The first rule of property investment is that you must invest, not speculate. Most people buy with emotion, but property investment is different from buying your own home. Here you need a well thought out strategy with measurable goals. By having a plan and a system to gauge the worth of an investment you will achieve better results.

2. Property is a high-growth investment

Investors make money in three ways: capital growth (perhaps assisted by renovations or development), rent, and tax benefits like negative gearing or depreciation allowances. Capital growth is the most important. Often this goes hand-in-hand with lower rental returns, but that should not deter the investor from pursuing growth. And with this growth comes extra equity which in turn allows borrowing for further investments. This is not possible with properties that enjoy higher rental returns but slow growth.

3. The property market moves in cycles

Though the long term average growth rate of property is in the order of 8% – 10%, property values tend to rise in cycles. This means that some years will be strong, but others will be flat or prices may even go backwards. Typically the property cycle goes in four phases: boom, slump, stabilisation and upturn. Understanding the relationship between the different phases in the market is critical if you want to maximise your return whilst being exposed to lower risk.

4. Land appreciates

The land component should be a high proportion of the price you pay for a property, as this is the part of the asset that will appreciate, whilst the building itself will probably depreciate over time. Therefore inner and middle ring suburbs of capital cities are attractive, as land is in high demand but short supply. Conversely, properties in new suburbs are less likely to enjoy strong capital growth as there is no shortage of land in those areas.

5. Buy properties that will be in continuous, strong demand

Today medium density properties (apartments and townhouses) make great investments due in part to the fact that they are more affordable, and therefore enjoy strong demand. The demand for this type of housing is also due to lifestyle changes: we are increasingly time-poor and starting families later in life. This means we want to live closer to work, transport, entertainment, cafes, shops and beaches.

6. It’s about property

Successful property investing is not about finance, tax or structuring. It’s about buying the best property you can afford in the right location, at the right time in the cycle and at a fair price. Without a doubt, for the majority of investors established properties will always offer far better capital growth potential than a new property for a number of reasons. On a new property:

  • you’re paying the developer for their profit margin and marketing costs, as well as estate agent commissions
  • you sacrifice the potential to add value through renovations
  • you’re better able to gauge whether the price for an established property is fair, as there is plenty of comparable property data to research.

7. Demographics hold the key

The increasing population in general, and the increase in people aged 25 to 29, are leading to a chronic housing shortage. The majority of these people are going to live in our capital cities. Currently 70% of our population live in our capital cities, and trends suggest this could increase to 80% in time. Also Australia is an aging society. Over the next 15 years Australia’s 5.3 million baby boomers are going to reach retirement age. As they leave the workforce they will stop paying tax, many will go onto the pension, and most will use the public healthcare system. The government needs to find the extra money to pay for this. The two main options are to increase taxes or to increase the number of people who are working and paying taxes. This latter option is the more attractive and likely one, which is and will continue to be achieved through immigration. All of these extra people will of course need a home and most will want to live in the inner and middle rings of our capital cities.

8. Surround yourself with a good team

Having a good team reduces your risk, increases your knowledge, and gives you access to ideas, opportunities and funds you would never have on your own. You need two main groups of people:

  • Advisers. These include a tax-savvy accountant, a smart lawyer, a bright mortgage broker, a bookkeeper, and an independent property investment strategist.
  • Mentors. These are people who know more, have done more, and are skilled and successful in the areas about which you’re currently learning.

This article is reproduced from Heart1stop.com