Investment Tips
By Whittaker Hamilton
It has become quite apparent that recently this forum is becoming a lot more active. With a vast range of investors from new to seasoned popping in for a chat.
I have decided to write some handy advice which people can filter/use as they see fit.
General
• As there is a range of experience levels in this forum be careful not to take advice from just one person. It will only be their opinion. Try seeking out information from the seasoned investor too, they have been through property cycles and know how to survive them.
• Use the forums search function a lot of topics have already been discussed here. But if you cannot find anything just ask somebody will help you out.
Philosophy
• The property market works in cycles. It is fun and exciting for a couple of years when we have a boom (like we have just been through). But during any impending slump it is no longer the in thing to be doing and can at times be hard work.
• Property should not be treated as a get rich scheme (despite some seminars beliefs). If structured properly with the correct support it can be a reasonably safe wealth creation tool.
• Use as many resources as you can. Read past discussions here and go to the library to get some books out. There is a huge range of books available at the library and it means you can read them before you buy them for your bookshelf. Try: Planning for property success By Andrew King and grow rich with the property cycle By Kieran Trass. There are many other recommended books available and even reviews on this site.
• Form your own opinion based on what you believe is your own safety level. People can tell you to mortgage to say 80% but if you won’t sleep well at night due to worry don’t do it. Only go as deep as you feel comfortable.
• Try to be careful on how deep and fast you get into the property market. Use the advice from seasoned investors who have been through it all before. Most people can make money during a property boom just from buying any property. But it is buying the right property to hold long term that is harder. You will hear many stories from investors who purchased large amounts of property only to lose most of the gains during the slump. Buy the right property from day 1 and don’t be one of the statistics that need to sell up when the market tightens.
• Write down all the things that are stopping you from investing or that would affect you sleeping at night if you were investing. These are now you’re “What if’s”. What if interest rates go up? What if tenant builds a P lab? What if house burns down? What if house gets trashed? What if property goes down in value? What if rents drop? Etc. Now you can work on a plan to cover these. Eg. Insurance.
• Beware: Too many people can suffer "Paralysis by analysis”. By the time they invest the boom is all but over. This is Fear of investing.
Structure
• If you are serious to be a long-term investor get a structure in place to protect yourself and your assets.
• If you are going to use any statistics for house growth ensure you use 10 year growth figures. 1-year figures are deceptive and do not indicate possible future growth. During a boom even the poorer suburbs can experience growth that looks good. 10 year figures will most likely include a complete cycle boom through to slump. Shorter terms will miss part of the cycle and not be accurate.
• I heard an interesting stat that out of all the banks long term interest rate predictions they have had poor odds at getting it right. This would be similar to economist’s long term property value predictions I guess. Past history is no guarantee of future growth and long term factors are very hard to predict as something usually happens to alter the forecasts. (Wars, terrorism, floods, earthquakes, Asian crisis). However saying that we can usually see into the short term and be semi reliable. Using historical growth and buying in the right location at the right price can put us ahead of those blindly purchasing to follow a boom.
• A good way to protect yourself is to use the “What if’s” (See Philosophy above). Decide if you are going to protect yourself from anything that concerns you with regards investing. Most things that concern people and prevent them from investing can be covered by a well thought out plan. Do this from day one.
Finance
• Avoid using the 1 bank trap. This is simply where an investor gets comfortable with there current bank giving the bank complete control over there entire portfolio. Banks will like to cross collaterise if given the chance. Using several banks spreads your loans around and reduces the risk of your portfolio being called up if the economy turns bad.
• Banks use Loan to value ratio (LVR/ Equity) and debt service ratio (DSR/ Cashflow) to determine your ability to acquire a loan. It is safer to drop back and keep your serviceability low at end of a boom. This will enable you to have a buffer if things get tough and let you ride out any pending downturn in the market (Slump). Historically rents and house prices usually drop back from their peak.
• Ramp up your serviceability leading into next boom. This is when you need to use your servicing to catch the wave and build some serious equity.
• Just as it is sometimes safer to diversify your property locations. You should do similar with your borrowings. Interest rate diversification. Spread any fixed rate terms over a range of dates so all your loans are not expiring at same time. Interest rates move around regularly and you do not want to be caught out needing to have your entire portfolio expire at a time when rates may be high.
• There is a large amount of opinion on Principle and interest (P&I) loans versus interest only (IO). The general consensus is if you have non-tax deductible debt e.g. personal house mortgage. Then use Interest only and pay down the non-tax deductible debt with the money you will be saving in lower loan payments. Otherwise if you have no bad debt the choice is up to you P&I or IO. IO can allow you to accumulate more property but P&I can be good during a slump too as the debt is being paid off slowly.
Purchasing
• Treat real estate agents with respect. They are there to help and can provide valuable information needed before you make an offer. You may need them at another stage in life, What if you need to sell a property quickly?
• Analyse your purchase and rent figures. Know your exact cashflow position when buying. That way when/ if rents or property values drop you know if you will have sufficient cashflow to survive.
• Use morals when purchasing property. You will feel better. Why invest if you cannot be happy doing so. Some people use non-moral techniques to acquire property cheaply, watch out as Karma usually bites those people.
Example strategy
A strategy of investing could be as a simple as this:
• Always be aware of current serviceability levels.
• Property values can raise and fall so knowing your levels you can be prepared.
• At the end of a property boom it is probably better to have a lower servicing level. That way if prices drop you are more protected.
• Try to buy wisely during any down turn in the market so as not to affect your servicing level. . Buy creatively and try to achieve high yields eg. Buy a 2 Br and convert to a 3 Br.
• Buy in good areas which will see growth early as the next property cycle rolls around. That way you can be in a position to use your gains early and go hard into a boom. Being 1 step ahead of other investors who may have purchased last cycle in less desirable areas.
• As the property market picks up and we lead into the next boom raise servicing levels high. Buy up big as each property shows equity growth.
• As the boom is nearing an end consider dropping servicing level once again.
• Repeat process.
Note: This was an example strategy. Every investor is different and needs to work out a plan that suits them and there risk profile. Think outside the square, use renovations, developments, buy and sell, buy and hold, commercial.
My 2 cents
A lot of people have gone out and have maxed out serviceability levels to buy numerous properties through the hype of a boom. This on its own may not be bad but could be slightly flawed during a slump. If values do not increase much in years to come they will quickly run out of serviceability and find they have to wait quite a while.
As a side note some of these people have been purchasing in less than desirable areas. Which are slow to move in value until later in a property cycle (ripple effect) so they won't be able to benefit until well into any property boom.
One thing to consider when purchasing in less desirable areas is the ripple effect during a boom.
Take the last boom we have just been through as an example. Some of these less desirable suburbs got there big jump in prices later on in the boom after others had already been through it.
This could cause implications for a portfolio of property. If the next boom continues to follow the ripple effect pattern you may not get the big price rise until the boom is well under way/ nearing its end.
This is not to say you will not get slow growth just that the large portion of any equity which may be created during a boom will not be usable until boom is well in truly arrived.
We want to be right there at the start of a boom ready to pounce before the rest of the herd push the prices up. Then when they do, they propel our property prices with them.