Is investing an art or science?

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Is successful property investing an art or a science?

Albert Einstein once said, “Compound Interest

Compound interest is the interest earned on the interest earned on your high growth assets and is so effective that Albert Einstein called it the most powerful force in the universe.This works both ways: Sophisticated investors use the power of compounding to grow their assets and become(…)

“>COMPOUND INTEREST IS THE EIGHTH wonder of the world.

He who understands it earns it… he who doesn’t… pays it.” compound interest money growth invest save

If we accept the above, then the longer we hold a property investment the more likely we are to make a gain.

As professional investors, we should be looking for a property that outperforms the average, as even a small gain above the average can create significantly different results.

Buying right also adds to risk minimisation.

For example, the following table shows how the value of a $500,000 property may differ depending on growth over time and highlights the significant difference that even a two per cent per annum growth rate can makeover 20 years.

Year/growth per annum 2% 5% 7% 10% 12%
0 $500K $500K $500K $500K $500K
10 $609K $814K $984K $1,297K $1,553K
20 $743K $1,327K $1,953K $3,364K $4,823K
30 $906K $2,161K $3,806K $8,725K $14,980K

Conversely, the wrong property will severely restrict any investor’s dream of financial security, or worse, after taking into account purchase costs, holding, and exit costs.

How many times have we heard that someone sold a property because it was underperforming only to see the next buyer make a success of it?

The question is why?

And given that property can be such a great investment mechanism why do many of us stop at only one or two properties.?

RECIPE FOR SUCCESS

I’d argue the answer to both is that most investors are simply purchasing the wrong property.

So, what’s the basic recipe for successfully purchasing the right property?

Consider the following:

  1. Have a plan and work with a team that can assist you. Remember you can’t be the smartest person in your team.
  2. Do your research as not all properties are created equal and you need to be able to identify the differences.
    So, access to suburb reports, demographics, historical property values, square metre values, potential to improve, and local council rules will help focus your efforts.  
  3. Buy in proven higher capital growth areas.
    As equity increases so do your ability to use the equity to purchase more.
  4. Buy at below intrinsic value.
    While it’s difficult to buy cheap this comment infers buying below replacement cost but remember a small premium will become significant over 20 years, so buy on present value for future potential.
  5. Buy property with a twist – not the dry martini kind but something that’s different.
    This can be location, floor layout, nearby amenities, transport, a high proportion of owner-occupiers, views, off-street parking, storage or a brand name developer to name a few.
  6. Don’t just rely on market forces to move values as anything can happen.
    Take charge and maybe you can add value with a cosmetic renovation or structural improvement.
  7. Set up the correct loan structure.
    Look at both fixed and variable, offset or redraw, and loan-to-value ratio (LVR).
    Investors should also have access to a safety net fund in case of an emergency.
    A ‘buffer’, such as access savings, equity, or other cash resources is vital if things go wrong.  Even in the worst-case scenario a buffer will buy time and allow us to sell the property in a more orderly manner.
  8. Buy in an ownership structure that will meet your requirements.
    This could include buying in individual names, together (joint or tenants in common), trusts or companies.  All have significant pros or cons so remember to seek advice.

Some more success factors

Having put in place your strategic plan you need to ensure a number of other basics are taken care of at around the time of purchase.

  • From the outset, you should be working with a specialist property strategist – one who is independent, has no properties for sale, and whose advice is not limited to one state, city, or property type.
    And of course, one who has NO properties to sell.40392725 L
  • Get an accurate depreciation schedule from a quantity surveyor, as your accountant wouldn’t normally be approved by the tax department to prepare these.
    If you’ve purchased with someone else then arrange for a split depreciation schedule as this can significantly increase the overall annual expense.
  • Remember to add up all costs related to borrowing such as bank fees, Valuation
A property valuation is when a qualified valuer assesses certain aspects of a property to determine its “value” – the price is it likley to sell for.This is different to a market appraisal from an estate agent.A property valuation is generally conducted on a request by you, or a lending(…)

“>valuation, and lenders’ mortgage insurance as you can also write this off over the life of the loan or five years, whichever is lowest.

  • To minimise your accounting fees, get your real estate agent to pay for everything other than interest, as they will give you a monthly and annual statement. You then only need to keep bank statements.
    Remember if you have dual-purpose borrowings, i.e. investment and personal, then get a Split Loan
  • A split loan allows you to allocate a portion of your loan amount to attract a variable interest rate, and another portion to attract a fixed rate.
    This means you are able to take advantage of the security of a fixed rate but with the flexibility of a variable rate, as well as reduce the(…)

    “>split loan so that you get separate bank statements.

  • Land tax is a fairly muddy area.
    Each state has different Land Tax