Confused about what to do next? We’ve grilled Australia’s leading investors to discover what line of thinking helped them and what held them back
Property investors are currently overwhelmed with choices and overloaded with information – if you’re confused, you’re not alone.
That’s why we turned to the experts for advice – specifically, for the best advice they’ve ever received as well as the worst advice they ever got.
Their answers are wide and varied, but it seems that one prevailing theme ran through: the right attitude and a positive mindset.
Michael Yardney, director, Metropole Property Strategists
Best advice: Treat your property investments like a business
Worst advice: Property investment is easy
Over the years I’ve seen a small group of property investors, those who treat their investments like a business, become very, very rich by growing a multi-million dollar investment property portfolio. They do this understanding “the system” and getting the right type of finance, setting up the correct ownership and asset protection structures and knowing how to legally use the taxation system to their advantage.
Let’s face it; the majority of Australians will be always be employees but we all have the ability to become financially free by becoming property investors who treat their investments like a business. And you can set up your own property investment business while you are still an employee or self-employed.
In fact, that’s what I did and what almost every wealthy property investor I know has done.
They built their wealth by growing their real estate portfolio one property at a time. While this was going on they lived off the income they earned from their day job. They started off with one property, then leveraged off its capital growth to invest in another and another until one day they found themselves with a true property investment business.
I was told that property investment is easy. This was clearly wrong because most property investors fail!
Look at the facts – 50% of those who get into property investment sell up in the first five years and of those who keep their properties, the vast majority never end up owning more than one or two properties. This means they don’t ever achieve the financial independence they desire.
However over the years I found property investment is simple, but not easy. And that’s not a play on words.
It’s simple if you follow a proven formula but it’s really hard to become wealthy in property if you do what everyone else is doing. While many investors chase cash flow or the next hot spot, I’ve found successful investors build their asset base.
Over the years I have developed a four stranded strategic approach to property investment that ensures the properties I buy a property will outperform the market averages.
I buy a property below its intrinsic value.
In an area that has a long history of strong capital growth
I look for a property with a twist – something unique or special or different or scarce about it.
And a property where I can “manufacture capital growth” through refurbishment renovations or redevelopment.
This means I minimise my risks and maximise my upside as each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour. If one strand lets me down, I have two or three others supporting my property’s performance.
Tyron Hyde, director, Washington Brown Quantity Surveyor
Best advice: You never make real money working for someone else
Worst advice: Invest in shares
When I was 17, working at McDonalds and doing my HSC, my soon to be brother-in-law, a developer, said two things that changed my life: “You can only ever make real money working for yourself” and “McDonalds really is a property development company – they just sell hamburgers on the side”.
As I was flipping those burgers I was thinking “there’s got to be more to life”…and as I tried to work out what he meant by McDonalds being a property developer I enrolled in a Bachelor of Construction Economics. The course led me to becoming a Quantity Surveyor.
Before this I never really had an interest in property so his advice certainly steered my career path, because it was during my degree back in 1993 that I applied for a cadet role at Washington Brown. Now I own the company.
A few years into my work at Washington brown, aged 25, I wrote a thesis on Property Depreciation, and thought….this could be a good business opportunity.
This is where Part 2 of the advice kicked in. You never make real money working for someone else. So I left Washington Brown – and my mentor who then owned the company – and started my own quantity surveying firm called “Property Depreciation Pty Ltd”. I did that for about a year and half, and once my old boss at Washington Brown saw that it was successful, he invited me back as a Partner. I haven’t looked back since.
The worst advice I ever received was from a financial planner who led me down the path of investing in shares. I have never lost money in property, but I certainly have with shares.
In hindsight, I should’ve stuck to what I know – property. But the allure of buying shares in a company that you don’t own – then sitting back and letting that money grow – was appealing.
Fast forward to the GFC and hey presto it wasn’t so alluring after all! I have always found that letting someone else make money for you ends in tears. To me, investing in the stock market is the easy option, unless you know what you’re doing.
And whilst letting someone else make you money, can work, I would rather back myself. Whether that’s investing in my business or trusting my property skills to know if an opportunity is likely to pay off.
So my own advice – Invest and nurture what you know best – YOU.
Heidi Armstrong, State Custodians Mortgage Company
Best advice: Your home is an investment and may one day become an investment property
Worst advice: Buy off-the-plan
It is often difficult to ignore the impact and benefits of the very simple and basic investment advice such as “reduce personal debt”.
However I learnt that there is a layer of complication that gets ignored in the dispensing of this simple advice. The complicating factor is change. What happens when you make changes such as upgrade to a new residence and turn your existing home into an investment property? Is that simple advice of “reduce personal debt” really all that helpful? I think it has its limitations.
I was lucky enough to have operated our home loan using an offset account. So although we had taken the simple advice and “reduced personal debt” quite quickly, our extra funds had always remained in our offset account and not in the loan itself.
This meant that when we ended up turning the existing residence into an investment property, the loan balance remained high allowing us to maximise our tax gearing benefits. At the same time, we could easily pull the funds out of the offset account to put towards the purchase of our new upgraded residence in order to cut back on the extent of our new owner occupied debt.
It was extremely valuable knowing that financing an investment requires a strategy that doesn’t just work for today but for the future as well.
The worst advice
Despite the fact this story has a happy outcome, I still feel that the advice I received about purchasing “off-the-plan” was poor. In around 1997 I purchased a property off-the-plan in Victoria. I secured the property with a long term deposit bond evidencing my cash savings and PAYG income to qualify.
The property was completed about two and-a-half-years later at which time I was no longer employed PAYG but was self – employed, operating a relatively new business. Whilst buying off-the-plan had the advantage of not inconsequential stamp duty savings, it was difficult (a greater deposit required) and more expensive (higher interest rate) to arrange finance due to my changed employment circumstances.
The upside was that the property was valued on completion significantly more than I paid for it. This helped considerably when I was seeking finance to settle on the property. If the market had been more reflective of where we are in today’s property cycle, I dare say my ability to settle on the property would have been quite low.
People looking to buy off-the-plan need to understand the risk associated with it. Any approval you get for finance today is irrelevant and worthless if you have to settle in 2 years’ time. Life brings change, and in my opinion, purchasing off-the-plan doesn’t accommodate for this particularly well.
Rich Harvey, managing director, propertybuyer.com.au
Best advice: Get educated about finance
Worst advice: Invest in a mezzanine fund with a developer
The best investment advice I ever received was to become more educated and financially literate. The more educated I became; the easier it was for me to understand how property markets and investing really works. By investing in my own education I was investing in my own ability to make wise decisions and invest smartly.
I quickly learned the power of leverage. I had some equity in my own home and when I learned how to use that equity safely to purchase investment properties I was off and running. In my early years I attended numerous seminars and property courses to increase my knowledge.
I learned the power of research and how to analyse property from both a macro and micro perspective. I got to know Property Investment Analysis (PIA) extremely well. As an economist I loved to crunch the numbers and see the bottom line. But I also had a touch of that disease called “paralysis of analysis” which prevented me from investing. I was often gripped by the fear of making a loss.
I remember going to seek the advice of several financial planners. None of these planners gave me the confidence that they had my best interests at heart. They all seemed to be steering me into managed funds from which they could make the high fees. Once I had enough confidence to invest in property and understood how property investment worked, I bought three properties in one year. This set me on my path to becoming a successful property investor. I also developed a passion to educate and help others in the journey of property investment. Fear seems to be the thing that holds most people back. Fear of making a mistake, fear of the unknown, fear of property prices crashing or picking the wrong property or the wrong area. Yet investing during times of uncertainty has also proven to be the times when I’ve made the most money in property investment. If you complete your due diligence well, this protects you from buying a lemon!
I also received excellent advice in organising my finances. Structuring your finances to maximise your borrowing capacity safely is an excellent strategy for property investment. Rather than going directly to a bank, I was advised to use a mortgage broker to help organise my loans. My mortgage broker has proved an invaluable source of advice in getting the best loans for my portfolio. He put me with the tough lenders first then used the second tier lenders for subsequent loans. The broker can sift through hundreds of different loan products very quickly to help me pick the best product. The broker also helped me to revalue and refinance my investment properties, so that I could extract the equity and move into buying further properties.
Another great piece of advice I received was about the power of leverage. I quickly understood that I couldn’t do it all on my own, I gathered a team of experts around me. Apart from a finance broker, I needed a tax accountant, buyers’ agent, solicitor, depreciation specialist, building inspector and property manager. In choosing advice I always look at the motive behind the person giving me that advice. Do they have a vested interest or do they have some hidden agenda in providing that advice? Or is the advice truly objective and not tied to commissions?
That’s just one of the reasons I decided to become a buyers’ advocate. To help people get independent advice around property research and investment decisions. Doing quality research takes an enormous amount of time. My mentors advised me to not take shortcuts with research. My advisors told me to focus on areas of high demand and constricted supply. This has been absolutely golden advice when it comes to choosing the right area for property investment.
In my early days of investing I had to learn to take action and implement the knowledge I gained. There’s no point buying and reading all the magazines and books about property investment if you never intend to build a portfolio.
The worst investment advice I ever received was from a financial planner. The planner recommended that I placed a significant sum of money into a mezzanine fund with a developer. The returns sounded very attractive at 20% pa. I was blissfully unaware of the risk factors around this type of investment and the character of this developer. And you can guess what happened next. We ended up losing all the money we placed with this developer. The only positive out of this story is that it happened a long time ago, early in our investment career, and we have learned by our mistakes and had time to rebuild.
Taking the advice of a sales agent on face value was other worst advice we received. Some people, including us in the early days, were naïve enough to simply trust developers and the glossy brochures they produced. It’s so important to dig deep by asking tough questions and get the real facts out of any property investment opportunity. You have to analyse the cash flow and the projected returns to make sure the investment is worthwhile.
When attending some of the property courses in the early days, we also received advice to go big and go fast. The presenters would say that you need to have “big hairy audacious goals” (BHAGS). But we also saw people who attended those courses go off and commit financial suicide by buying more properties than they could manage financially.
It’s important not to get ahead of yourself. It’s great to have ambition and financial goals, but you need to achieve them at a realistic and sustainable rate. This is where financial discipline is so critical. You need to manage your income and contain your expenses, balance the books and have a clear strategy for investing for the future. You don’t become wealthy in property by chance. You become wealthy by adopting a planned approach to investing in well-positioned and quality properties.