Property Investing: A Beginner’s Guide

If you’re looking to head down the path of property investment, it’s not necessarily harder for beginners in comparison to those with more experience. In reality, the only difference is education.

For first time investors, it can seem a bit overwhelming to begin with – especially when so much negative press forecasts impending doom and gloom around every corner. However, when you’ve got an experienced team at your side, the process can be profitable and rather exciting!

That said, while you may be tempted to join enthused investors who rush into the housing market as it surges ahead, you’ve got to be a bit cautious. After all, you do not want to sink on your first purchasing voyage. It’s all about understanding the difference between negative and positive geared property, managing your finances and ensuring you have the support of the right people.

It’s important to plan before setting sail, and to consider the following:

1. Surround Yourself With The Right People

Some things should be done alone. Investing, however, is not one of them. Striking out on your own is a selfish and antiquated way to do business. A better (and smarter) way is to surround yourself with family and close friends who can support you as you move through your journey to financial success.

Another key part of success is obtaining experienced counsel. Your passage will be much calmer if you pull together a team of professionals who can guide you through rough waters, step by step. You would do well to seek advice from experienced conveyancers, finance brokers, buyer’s advocates, solicitors, accountants and depreciation experts, to name but a few.

It’s often preferable that these specialists be personally involved in the property investing game so they can better assist you in achieving property success. When you surround yourself with merchants who are property-focused – who are investors themselves – the advice you obtain will be well suited to your unique position as a property investor. For example, a superior accountant will know the smartest way to find you more cash flow to support your property portfolio.

2. Seek Professional Assistance

Investment agents are focused on your success – looking out for your interest in the market. A good agent can help in many ways, from making you money to helping you to explore new areas.

Help select the best property for your needs and strategy
Help expose what the selling agent hasn’t
Guide you through the buying process
Introduce you to ideas and areas that you may not know
Connect you with a trusted team
Prepare detailed comparable market analysis on properties
Prepare purchase offer
Negotiate on your behalf
Help close a deal
3. Legal Assistance

You will need to appoint a solicitor or conveyancer/legal representative to ensure that the contract is in your best interest and does not contain any unsatisfactory terms. Make sure you know your legal representative’s qualifications and exactly what service they are offering. Their role is to:\

Facilitate council, strata and company title searches
Arrange for the exchange of contracts
Give advice on the property contract
Order pest and building inspections
Negotiate with the vendor’s solicitor on your behalf
Arrange for the settlement process
Deal with any difficulties that arise during the settlement period.
It is a good idea to ‘shop around’ for someone experienced, or feel free to call the office for our recommendations.

4. Manage Your Finances

As a beginning property investor, it’s unlikely that you will require an accountant to set up rigidly constructed structures for your property portfolio. Experience has shown that accountants and planners often like to set up company and trust structures for individuals who don’t even own real estate.

The reason they often do this, unfortunately, is to benefit their own pocketbooks, through the subsequent set-up fees they will charge. In general, first time property investors buying their first handful of properties don’t need complex structures, however as you move through your investment journey, it is prudent to start to manage your buying protection by working with a property-focused accountant.

Do not employ an accountant who doesn’t own property. They show a lack of knowledge on the ability to acquire wealth through property investing – mainly because they themselves are not wealthy.

When you are ready for the needs of a financial planner or accountant they can:

Give you advice on buying structures
Strategically keep you finance ready
Create a tax effective vision for the future
Help with tax losses and gains
Help with distributions and family asset planning

5. Property Strategists With Mentoring Programs

Strategists will help you determine where you are at right now within your property portfolio and recommend the best and safest type of strategy for you to adopt as you move forward with your investing. As a coach, strategists will act as your partner on ideas, deals and principles to get your portfolio moving in the right direction.

Strategists are very motivating people. They will encourage you – helping you to push right past the self-imposed boundaries that are holding you back from achieving the success that you deserve. When you meet with a mentoring property strategist you can expect to:

Have a property strategy meeting
Discuss life goals planning
Have an analysis of property deals
Get connected with a trusted team
Concentrate on the core (property)
Learn how to keep emotions out of property ideas

6. Set Yourself Up For Success

Building an investment portfolio is much like building a ship – not only do you need to know the bow from the stern, you’ve got to know what your vessel can and cannot be expected to do. As an investor, to achieve success you must grow – you must plan for the future.

It’s difficult to establish a plan, however, if you’re not sure where you want to go. After all, how will you know when you’ve arrived? Property investing for beginners can be made much easier once you understand all of the ins and outs of the process. We would highly recommend that in order to achieve the best results, consider the following information before you even purchase your first property.

What Happens If I Buy More Than One Property Per Year?

When you buy more than one property per year you speed up the acquisition phase of your investing journey. We all go through an accumulation phase of owning assets. The more that we can control and balance, the more money we can consolidate into the future.

There is absolutely nothing wrong with buying properties more quickly than one per year – if you define what you want. No doubt, it’s also important to consider what your extra money buffer looks like and what your credit file looks like.

Exposing yourself to properties needs careful consideration from funding elements, so don’t expect to buy a few properties in a year while getting hits on your credit rate by applying for a credit card or a new car. If you can, balance your portfolio and keep a buffer.

The implications are simple. You are doubling down on a good strategy because you’re buying real estate! Be diverse, choosing one capital growth property and one cash flow property. Choose properties in different areas as well.

What Is The Best Way To Manage My Credit Risk?

You need to examine risk in two parts. One part – what your funder thinks of your risk. In this situation it is better to NOT CROSS SECURITISE your loans. You don’t want one bank to control your loan-to-value ratio (LVR), redraws and money. You want to keep your portfolio liquid to sell one day. Do not cross your loans.

The other risk is mitigated by having a buffer. It’s smart money management to keep a good chunk of cash liquid to pay for any unexpected bumps along the way – and there will be bumps. Banks will look at your risk profile by considering the following:

Age
Proof of savings
Stability of employment
Other securities
Net worth
Employed or self employed
Rental incomes
How Will The Speed At Which I Build My Portfolio Hinder My Serviceability And Borrowing Capacity?

To keep your debt-to-service ratio (DSR) from dropping, as an investor you can choose properties which have higher yields. This can also help improve your borrowing capacity as well. It is a myth to say that you cannot own numerous properties because you run out of servicing. Remember, the goal is 10 properties, so we do NOT need 10 positive cash flow properties in regional or risky towns.

What we do need is to strike a balance. We need to consider a positive cash flow property for every two negatively geared properties. That should see us well balanced and unhindered.

What Happens If I’m Struggling To Find Tenants?

If you’ve got the right buffer set up, you will overcome any vacancy rates. Most vacancy rates in Australia are low. Other than a few isolated incidents we are not seeing an oversupply in the market, so properties should rent, if you price them to rent. It could be a stressful time for investors right now, so this is where we have to examine our investing virtues.

For example, flexibility is important. The real estate world is continually presenting us with surprises, many of them unpleasant. Some people like a certain rigidity and do not tolerate change well. Inflexibility is correlated with a high level of impatience – a trait which will not serve you well in property investing.

In practical terms, one example of being prepared to be flexible within real estate is when you have a vacant property. Although getting a high return is important, being flexible to dropping the rent a few dollars to get a lease signed leads to a happy, less stressful and faster outcome most of the time. Yet many investors become inflexible and that leads to blame and a poor property experience.

Why Is Cash Flow So Important?

Are you wondering whether you should buy positive cash flow or capital growth property? The answer is BOTH. Both add value to your portfolio and can help you reduce debt on your home loan. If you want to accumulate wealth for the future, then a blue-chip capital growth property will do that for you.

The next question then obviously is, how do you go and buy that capital growth property and create wealth? The answer is through cash flow. You can create cash flow by buying good, positive geared properties, which improve your buying power by putting money back in your pocket.

They also help your serviceability. This in turn means you will be able to buy a high capital growth property! Successful investors have mastered the fine art of balancing their portfolio, which allows them to continually move forward in building their wealth.

The statistics show that around 5 to 6 per cent of Australians have one investment property and around ONLY 2 per cent of the population own more than two properties! Why do you think that is? Mostly because people get stuck – their cash flow is low and they really don’t know how to move forward or they are simply not confident enough to keep investing.

When you hit the mark of between five to six properties you are certainly setting yourself up for a very comfortable future. If you then acquire between six to ten well-chosen properties, this is where you will find financial freedom! However less than 1 percent of Australians own 6 or more properties!

Should I Buy A Negative Or Positive Geared Property?

Following is a brief description of both gearing strategies to help you understand the benefits of each:

Positively geared properties –

A property is said to be positively geared when the rental return is higher than your loan repayments and outgoings. Positive cash flow properties are self-funding and are considered to be a conservative investment strategy that provides an income with exposure to the prospect of capital growth.

Bear in mind that with positive gearing there is the potential that tax will be payable on the net income (after the consideration of depreciation and other tax deductions). Positive gearing is beneficial when an individual does not have surplus cash flow to fund income losses during the ownership period or other income to offset losses.

Negatively geared properties –

A property is negatively geared when the rental return is less than your loan repayments and outgoings (placing you in an income loss position). There is, however, the underlying expectation that the accumulated losses will be more than offset by the capital growth on the property. In this circumstance the rental return is not considered as important in the decision process.

The key benefit associated with negative gearing is that the loss associated with the property ownership can be offset against other income earned, reducing your assessable tax income, thereby reducing your tax payable. The result is that the cost of owning the property is being funded by your tenant (in the form of rent), the tax office (in the form of tax savings) and your surplus cash flow.

Ultimately most investors will aim to be positively geared in the long run. Generally high tax payers choose the negatively geared investment option to maximise their tax returns and benefit from the long term capital growth potential. Investors who are closer to retirement or in a lower income bracket may choose positive geared properties to maximise their income potential.

Positively Geared Properties

A positive geared property is when the rental return is higher than your loan repayments and outgoings. Positive cash flow properties are self-funding and are considered to be a conservative investment strategy that provides an income with exposure to the prospect of capital growth.

Bear in mind that with positive gearing there is the potential that tax will be payable on the net income (after the consideration of depreciation and other tax deductions). A positive geared property is beneficial when an individual does not have surplus cash flow to fund income losses during the ownership period or other income to offset losses.

Make Sure You Choose The Right Capital Growth Property

Look for market cycles that are ready – places which have not grown for a while and get in at the right time. Look for property that you can add value to through a variety of ways including time in the market or minor renovations. Look to buy in places where huge infrastructure spends are being injected and invest there. Considering these factors before purchasing an investment will ensure you make a good profit!

Building And Pest Inspections

Building and pest inspections are very important! Your legal representative will enlist the services of an authorised pest and building inspector. Your purchase contract can be subject to a satisfactory inspection or your inspection can be scheduled during your cooling off period. The inspector will provide a written report pointing out any faults in the property, whether they can be repaired and how much these repairs are likely to cost.

Pest inspections are not usually covered in a building report so they will need to be arranged separately. If buying at auction, you will need to ensure that all inspections are completed prior to the day of the auction.

In the case of a strata title property, your contract for sale will provide the name of the strata manager so that you can arrange for an inspection of the books and records of the owners’ corporation.

Your legal representative should also advise you of any future developments that could affect your home by checking with the local council.

Self-Limiting Focus

Some novice investors tend to develop an image in their mind’s eye of the kind of property they believe suits their image of themselves as an investor. It’s also an image which typifies the way they want the world to view them as well. In some ways, the investor begins to identify with the image, which can lead most new investors to concentrate on one area or one deal that matches their particular worldview. This practice, for many of us, has been cultivated since birth.

Self-image is a curse in property; it denies you one basic principle: “throw a wide net out into the market and see what you can catch”. What you catch may not be what you identify with, but it will more than likely be profitable.

For most of us, we rush into the first property purchase based on a fear of loss – of not being involved. We believe there isn’t enough property to go ’round. These fears are unfounded. Become nonchalant about property and don’t focus on just one deal. Take a look at a minimum of twenty properties – simultaneously!

Make offers on property constantly. Make low offers. See what you can fish out. We need to throw off that image of finding that one, “right” property and discover the ability to look at multiple deals at one time. Buyers too often create a blind spot to opportunity by adapting a narrow focus. Undoubtedly, one of the biggest mistakes buyers make is to become snobbish about a deal.

It’s important to understand that there is a ratio for everything. For a batsman in cricket, it’s called a batting average. The best cricketers in the modern game have an average of around 45/100. Every time they bat, they get 45 with the high aim of 100.

In property – it’s one out of twenty. For every twenty offers you make, you will get one come back, and that raises a level of interest that is worthy of your hard earned investment money, so you need to learn to make offers.

Buying Property Based Upon A Pre-Approval

Naturally, when we want to buy a property we see a broker or a lender, who will give us an indication of how much we can borrow. This is often known as a pre-approval. For example, a lender may tell you that, based upon your deposit amount, they will lend you $300,000.

So then, of course, you go off and put a deposit down on a $300,000 property. What you may not realise is that the bank or lender reserves the right to change their mind if they deem the property, in their opinion, to be a risky investment.

For example, the bank may actually have a lending restriction on an area or a postcode or a type of dwelling. This is not an uncommon event – many people get into strife this way. The following testimony of one of our property mentors highlights just how problematic it can be to rely completely on a pre-approval:

“I have a client who undertook a deal before working within the Positive Real Estate system. She relied upon the pre-approval authorisation issued by her lender, however much to her chagrin, she did not obtain the results she was seeking.

Having been to a bank, the woman was told that she could easily borrow $700,000 as she had around $100,000 which would cover a 10% deposit, stamp duty and closing costs. She was given a letter which stated that the bank had pre-approved her.

Wanting to add cash flow positive property to her portfolio, she went to a small town that was famous for high returns and put a deposit on a property. A $70,000 deposit. She understood that the pre-approval meant that she would be unchallenged for finance.

She used a Melbourne Bank that was far removed from the locality she was buying in and the lender had no idea where she had intended to invest. When it came to settlement, the bank agreed to lend only 80% of the value of the property and not 90% per their pre-approval letter. The bank had changed its lending amount based upon their internal gauge of the risk of that suburb.

Unfortunately, she could not rustle together the shortfall, so she had to default on the property and could not settle. Her $70,000 deposit was lost to the seller.”

As you can see, pre-approvals are good to obtain, but they are just a guideline of what you can borrow. They should not be relied upon.

Take Control

How to master property investing, find financial success and overcome roadblocks

Put together a combination strategy which includes both cash flow and capital growth. This will provide you with the serviceability as a borrower and will allow you to continue to move forward, so you can buy more properties, borrow more money and keep building your wealth. Immediately build your cash flow up from your wages, rent return and tax deductions, especially if you are a PAYG earner (don’t wait until the end of the year to claim these – claim them weekly if possible).

Ensure you have the right finance solution and a personalised finance structure. Negotiate better interest rates and save your money immediately (i.e. shopping around for lower interest rates will absolutely improve your cash flow)!

Set up an offset account and learn how to use it correctly. Once you’ve set up your account, find the right positive cash flow properties that create excess cash flow that can then assist you to buy a high capital growth property. In simple terms, a positive cash flow property may actually pay you an excess amount of money after all your outgoings are paid.

For example, let’s say that a property for $170,000 which is renting for $300 per week, could actually improve your income by $1000 per annum over and above paying for all property outgoing and the interest rate or loan you have. This is known as positive geared property.

However, these properties may be high yielding yet may offer less capital growth. Conversely a property that may be in a better or more desirable locality may not carry a high rent over the purchase price. For example a property for $400,000 may only rent for $400 a week. You may actually need to contribute money from your wage to support the property. This is known as negative cash flow property.

Don’t let the negative cash flow be a reason not to purchase, as often negative cash flow properties grow in value expressly. Once you are trained on markets, you can buy with the knowledge that it’s likely that a property in a negative cash flow market will grow, soon after the purchase. Would you risk $50 a week on a property that may go up by $50,000 over two years? I’ll let you be the judge.

Seize control of your own destiny. Objectivism states that we can perceive the world through reason alone. This means that if you have an unachieved goal, you cannot blame your parents, your teachers, your friends or anybody else. Success and failure rests entirely with you.

Once you begin to understand that property investing for beginners offers the same formula for success as it does for experienced investors, you will being to see things a bit differently.

As captain of your own ship, the power of choice is within your grasp – right now. Take hold of the key fundamentals we offer and chart your course for financial independence now, rather than “someday”. When you take advantage of the tools that we offer, you will grow quickly from real estate novice to real estate investor, and reach your goals much sooner than if you tried to go it alone.

If you require further information regarding property investment, don’t hesitate to contact the team at Positive Real Estate today. We run seminars across Australia and also offer comprehensive mentoring programs, helping people to secure their future via real estate investment.

Register for a Property Investor Night to learn more about buying discount properties (including great tips for negotiating your price) inexpensive ways to add value to your investment and much, much more.

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Once you begin to understand that property investing for beginners offers the same formula for success as it does for experienced investors, you will being to see things a bit differently.

As captain of your own ship, the power of choice is within your grasp – right now. Take hold of the key fundamentals we offer and chart your course for financial independence now, rather than “someday”. When you take advantage of the tools that we offer, you will grow quickly from real estate novice to real estate investor, and reach your goals much sooner than if you tried to go it alone.

If you require further information regarding property investment, don’t hesitate to contact the team at Positive Real Estate today. We run seminars across Australia and also offer comprehensive mentoring programs, helping people to secure their future via real estate investment.

Register for a Property Investor Night to learn more about buying discount properties (including great tips for negotiating your price) inexpensive ways to add value to your investment and much, much more.