1. Formulate a strategy
Without wanting to start on a low, this is possibly the most difficult hurdle to get over. Many successful investors have got away without doing it, but the returns can be improved and the stress reduced if you do. Essentially you need to work out what you want, or need, to achieve and then work out how to get there.
Working out what you want or need to achieve may require outside help. You will need to ensure that by the time you want to stop work, investment property combined with your other assets is sufficient to provide the income you will require to live on (based on retiring at 65 you will statistically be on a 1,000 week holiday till you die!)
If you then calculate what you will have if you do nothing (for most that is superannuation worth around $160,000), you will then get an idea of the shortfall you face. Now, unless the future is very different from the past, I can assure you the easiest way to fill the gap is through property investment (very high earners and share trading geniuses excluded). Many people are blissfully unaware that they are facing a shortfall running in to the millions, or a pretty miserable retirement.
The 'getting there' calculation is then based on acquiring properties over time and assuming a (hopefully) conservative annual growth rate of 7%. This is all based on benefitting from long-term growth, and the longer you have the easier it will be.
2. Sort your finances out
Another tough one? I definitely suggest you talk to an expert on this one, as it is complex and can make or break your strategy. Start with what you want to do, then you may have to go with what you can actually do. It generally requires some savings, or usable equity in another property, and the ability to service the loan(s) and any shortfall in the cost of keeping the property.
3. Decide where to buy
This isn't easy either! Mainly because you generally need to do the opposite of what everyone else is doing. Even though you are working for long-term gain, it really helps if you benefit from a major upswing early on. To do this you need to buy in a soft or depressed market and not when it is going gangbusters. In addition, try and establish what will then drive that market forward (population growth, employment growth, infrastructure spend, amenities, lifestyle, supply constraints).
Currently Perth and Brisbane are suffering the most, whilst Melbourne has had a very good run but now is coming to a screaming halt. I believe that it will soon be Perth's turn to shine again, with the support of another major mining boom around the corner. And it really is a buyer's market out there. For those chasing yield then Sydney has some fantastic opportunities, with real recent examples of cheaper apartments providing over 8% rental returns.
A key pointer needs to be with regard to rental demand. Any short term drops in value are largely inconsequential if the product is consistently rented out and rents are generally steadily increasing.
4. Decide what to buy
This will often be a result of your personal circumstances. For those with the time and inclination, superior profits can be derived by renovating and/or subdividing. For many higher income (and time-poor) individuals it is more suitable to buy new property with better depreciation benefits. The 'house or apartment' argument has many factors, but is largely driven by choice of location and budget.
The key to minimising risk I believe is to be buying around or below the median price (for the city rather than a particular suburb, as that can fluctuate wildly). By keeping the price you pay down, you will always have an asset that provides better rental returns, and if you need to resell will generally appeal to a wider market (owner occupiers, first home buyers and investors)5. Decide when to buy
Finally, an easy one! If you've done your strategy and finances allow, go for it now. There are some fantastic opportunities out there at present. I can't guarantee anything, but if all goes well and the future follows the past, then buying something for $375,000 now should nett you a gain of $375,000 in 10 years and $1,125,000 in 20 years. The ongoing investment after purchase will be anything from $0 to $150 per week for probably a maximum of 8 years, dependent on the property and your tax bracket. So a maximum investment of $62,400 plus any initial deposit and buying costs for that return – hence why investment property is the easiest way to set you up for an enjoyable retirement: and for some an early one at that.
If you would like to discuss property investment or meet with Nick personally, please email Nick directly on nick.shinner@blackburne.com.au
