How To Profit with Property!

Ok, so everyone has their own “secret sauce” for getting ahead on the property ladder. I’ve pieced together mine from observation and experience in buying, holding and selling property over the past 25-odd years, as well as observing others and learning from experts with a track record.

For me – there are 3 Secrets to Property Success. Well, look, they’re not really secrets – but it sounds like the title of an E-book, doesn’t it! Moving on ………

I also learnt from my Dad. He took me aside when I was in my early 20’s and showed me the figures of how he’d fared with all his home purchases over the years. It demonstrated the property cycle to me very clearly.

But – if you’re only buying and selling your home and building up your equity, you’ll only ever own one property – and that was exactly how it worked out for my old man.

You won’t be surprised to hear what the first “Secret” is ……… (it’s a term I use a lot) ……

1 Leverage

If you leverage your existing assets, you can use Other People’s Money to magnify your own, and that will allow you to control a far larger portfolio of property than you would be able to without it.

Yes – that means having debt against your home. Your mum & dad probably told you that having debt against your home was “risky”.

“Pay off your home and be safe.”

“You’ll always have a roof over your head.”

Something like that.

That kind of thinking means that you can survive. Not thrive. It’s designed to allow you to survive on a pension in retirement.

I’m here to tell you that’s scarcity thinking. It’s also risky, in its own way. It sets you up to be part of the lowest common denominator (financially-speaking).

Would you like to change your thinking to abundance rather than scarcity?

Start here - Your home could be the hub in your wealth creation wheel. If you’re a “rent-vester”, well that means building up equity in your investment property/ies so you can go again.

Leverage allows you to Accumulate Assets.

Use the equity at your disposal and Leverage it to invest in more property! Have some “good debt” against your home to allow you to magnify your possibilities and opportunities.

What type of property, I hear you ask ???? And that leads me neatly onto the 2^nd Secret

2 Cash Flow

Cash flow is the phenomenon that allows you to hold an asset without it messing up the rest of your life.

The reality about investment in Australia is that the vast majority of property investors only ever buy one investment property. Why is that?

Cash flow.

If you are convinced that buying a negatively geared property is a good idea (lots of accountants seem to recommend this), be aware of the following:

Negative gearing means you are losing money.

If you are losing money on your investment property, where does that come from? It comes out of your pocket, out of your household budget, out of your lifestyle.

That’s OK if you’re willing to pay the price, or you’ve got disposable income that you don’t actually spend - but a lot of people decide they want to be an investor, get sold a property that loses money, and then get really annoyed when they have to adjust their lifestyle!

Typically, they sell the investment property before it has grown in value and go away telling everyone that property investment is a bad thing.

I’m not poo-pooing negative gearing altogether – but you’ve got to either have surplus cash flow elsewhere or the ability to tighten your belt.

Cash Flow allows you to Hold Assets.

Cash Flow is the 2^nd Secret to Property Success. If you can acquire property that does not significantly change your lifestyle (i.e. preferably cash flow neutral or cash-flow positive), then this will allow you to HOLD assets without financial stress.

3 Capital Growth

Capital growth is the 3^rd Secret to Property Success.

So, just to Recap - Leverage allows you to build a portfolio, cash flow allows you to hold it.

BUT …….. Capital Growth will Make you Wealthy.

This really IS the (not so) Secret Sauce.

Capital growth is when your assets go UP in value. It’s driven by supply and demand, population growth, infrastructure development and jobs. People need to be moving to a particular area for the housing market to grow in value.

What are the things that bring them there?

• Jobs – growing areas are ones where there are growing employment opportunities.

• Infrastructure – roads, schools, hospitals, airport expansions, shopping centres.

• Population Demographics – young families make for aspirational communities, and they create their own momentum.

Capital growth is the key to long term property wealth, and buying in the right place, at the right time, and buying the right TYPE of property is also important.

I have a very particular bias away from apartments – developers make a LOT of money selling these, but there are so many risk factors at play that they can be devalued very quickly. I shudder to think what is going to happen in apartment values in Sydney Melbourne and Brisbane in the next 3 years. I’ll watch with interest but I have no personal exposure there.

I have a very positive bias towards properties with a significant land content. I am firmly of the opinion that LAND is what goes UP in value, so the ratio of land to improvements is important.

(The taxman acknowledges that too – because they give you depreciation allowances for everything that gets built on top of it!)

So – I favour house & land, duplexes and townhouses because they have a land component. Units have negligible land component. If you put a small 12 apartment block on top of a block of land – they all effectively have 1/12^th of a block of land – pffffttttt!! Some apartment complexes have hundreds of units.

The different types of properties have different cash flow characteristics – duplexes or dual occupancy blocks tend to have better cash-flow characteristics – you get two incomes on one block of land and it makes it easier to hold it. From a portfolio perspective, it can also supplement something that has less positive cash-flow characteristics so your portfolio maintains itself.