Stephen Covey has a fantastic book called The 7 Habits of Highly Successful People which has a key chapter titled Begin with the End in Mind. Many property investors start because they have seen a colleague who has had a successful experience or have seen the newspapers going on about some massive rises in house prices and rush in for fear of missing out.
We all have different resources, skillsets, have different goals which we wish to achieve and different timeframes in which to achieve them in.
I have sat through thousands of interviews with existing or potential property investors and many state that they want to purchase a certain number of properties however without more analysis the goal they have set is meaningless as the reason for the properties should be a defined financial goal and thus more is required in regards to what value of property and what returns they expect from these.
Most investors get into it to provide a lifestyle or financial freedom at retirement age. Start by analyzing what this looks like and it is possible to work back from there to ascertain how many properties of a certain value need to be purchased.
Note to do this accurately some assumptions need to be made in regards to factors such as capital growth, inflation, rental growth, potential taxation changes etc. Because of this it may be worth spending time with a qualified Authorised Financial Advisor who can go through a plan with you in order to firm some of the assumed numbers up.
Once you know the end goal it is possible to work backwards in regards to the amount of activity that has to be done to achieve it.
If you haven’t had much experience or luck with goal setting consider using the S.M.A.R.T. goal system which is basically explained as follows;
S – Specific
M – Measurable
A – Attainable
R – Relevant
T – Timed
A specific goal has a much greater chance of being achieved than a general goal
A measureable goal lets you know if you are heading towards your target. If something isn’t measurable you don’t know if you are heading in the right direction.
When setting goals you want to set yourself a challenge however they need to be realistic otherwise you will give up. On the other hand don’t set the bar too low as you want to push yourself.
In order to achieve your goals they need to align with the direction that you want your life to go in. I have many property investors who state that they want to get into property trading however when questioned don’t really know why. If you allow yourself to get distracted it will be that much harder to achieve your targets.
If you don’t put timeframes in place it can be very easy to let things drift and get in front of what is important. As an example I have read a number of times a ratio that Property Investment author Dolf de Roos espoused where he stated to buy properties at a good discount that an investor may need to look at 100, from these they could offer on 10, it was likely that 3 would be accepted and the investor would probably purchase 1. From this it can be seen that if someone was wanting to purchase two houses in a year they would have to start by planning to look at 200 houses or roughly 4 per week.
Where to invest
Once you understand what you are wanting to achieve you can start deciding where to buy. If you are wanting to build a portfolio over time it can be worth trying to become an expert in a particular area as this will make it easier to ascertain over time what properties are worth and thus easier to spot a bargain.
Note that the larger cities tend to have better capital growth however generally have lower rental returns. On the flipside some of the smaller regional areas can at first glance appear to have outstanding returns however be careful as often smaller towns can have a higher risk of vacancy especially if the location is limited in regards to employment opportunities. I had an investor recently come to see me who was excited as he had purchased a property for $60k which had a weekly rent of $180 or just over a 15% gross yield. When looking at the numbers in more detail the rates were about $2k, the insurance costs close to a thousand, with the investor living out of town the property management costs another thousand and once analysed the real returns were actually under circa 5.5% which could have been achieved in a better location.
Understand that increases in supply tend to level out property prices so try and have an understanding of what development is likely to be happening in the years following in your target investment areas.
What type of property
Take some time to decide whether you want to invest in houses, units, apartments or other property types. Consider home & income properties or other multi income set ups which can often achieve a better return and can be a good way of getting into a better area or achieving a higher capital base as there can be more income to support it.
Note that while it may be easier to get certain properties at a discount look at the property from a long term point of view. Is there deferred maintenance? It can be hard as an example to get brick and tile properties for much of a discount however there can be considerable savings over time with the lower maintenance that comes with them.