Your must know your WHY
There are many secrets of real estate investing.
But first off, as a real estate investor, you must know your WHY. (I am using ‘you’ are a generic representation of a person who is thinking about real estate investing)
The most common reason I hear people say is to be financially free or have passive income during retirement. Keep asking the ‘why’ question until you come to the real reason as to why you want to invest in real estate.
So, why do you want to be a real estate investor?
(You may want to read this article to balance the debate about real estate investing: http://observer.com/2016/05/lies-cover-ups-and-half-truths-about-investing-in-real-estate/)
What are the other options available?
Some people jump into real estate investing because their friends have invested in real estate and they have not. Accountants tell us that we need a negative geared property to offset our tax liabilities.
Property is just a asset
Without a WHY, the property you buy is just an asset (or technically a liability on your personal balance sheet because it is an asset on the bank’s balance sheet) rather than an outcome you expect to support the achievement of your goals and to be financially free.
What are your reasons?
Whatever your real reasons are, your why of real estate investing will determine the WHAT and WHEN.
What does financial freedom looks like to you, in 10 years or 20 years time?
Determine what strategy and actions you need to get there.
What you do you want to achieve?
Determine what goals do you want to achieve. By when your goals need to be achieved?
The reality is that you must treat real estate investing as a business. Like anything else, it is a lot of hard work, commitment and perseverance over many years. It is not for the faint-hearted and you must treat it with respect.
Develop an abundance and business mindset. There are no emotions attached (especially when you need to increase the rent); just hard facts and detailed research and due diligence.
Real estate investing is a business
A question that must be constantly asked: Is this property deal or purchase going to make money in the long term and bring me closer to my goals?
Yes, make money! No one goes into a business with a view of making a financial loss.
Here is an interesting article to consider: http://www.macrobusiness.com.au/2016/10/victorian-property-investors-making-losses/. It reports that the average GROSS rental return in Australia is 3.9%, the NET rental return (after interest costs, management and repair costs etc., but before tax) is 0.4%.
At the basic level, you need to be able to start and manage a business, manage a team of professionals who are real estate investors themselves, and be able to research and analyse property deals.
Using a business analogy, you have customers (i.e., tenants) to attract by offering a product (i.e., your property) that they will ‘buy’ at the highest price (i.e., rental income) served by your staff (i.e., property agents).
Apart from having a business plan, aspiring business owners will have to draw up their personal balance sheet and indicative profit and loss statement for banks to evaluate their business and if all goes well, banks will loan them money to start a business.
It is no different for real estate investors. They must know their personal balance sheet containing all assets and liabilities, and what they expect to profit by owing a real estate property. When they submit the required documentation to the bank for evaluation, the banks are essentially evaluating their financial position. This is why financially literacy is so important for the real estate investor.
Options apart of real estate investing?
Real estate investing is just one of many vehicles available for generating passive income. You can own an online business, be part of a network marketing company or invest in shares, just to name a few.
The key is to look for something that does not trade time for money. If you need to work to earn money, then you are trading time for money. If you are investing or building a business system, then money works for you, hopefully.
What are your strengths?
The main point is to look for something that suits who you really are, your strengths and interest, and what you can be excellent in. You must be able to start and manage a business and promote yourself regardless of which path you take. Not many will treat real estate investing as a hobby or interest.
If real estate investing is something you really want to do, then you need to be excellent in it where your strengths equal business profits. Education is so important. It enhances your strengths. Do be prepared to spend money on your education.
You must assemble and manage the right team of professionals who will get you closer to your goals. Your real estate investment strategy will communicate your goals and strategies to your team members. Imagine a football team without a strategy and game plan! Real estate investing is no different.
When we fail to plan, we plan to fail!
The Australian Taxation Statistics 2010-11 shows that of those who stay in the game: 73% of investors only own one investment property, 18% of investors own two investment properties, 5% of investors owned three investment properties, 2% of investors own four investment properties and 2% of investors own five or more investment properties.
You cannot invest in real estate without a plan or strategy
Your strategy will be shaped by your financial buying power and serviceability (borrowing power). They are two crucial sides of the equation that will give you the ability to buy investment properties. Financing is the lifeblood of your real estate investing business.
Buying power simply tells us how far your available equity will go towards deposits and costs whereas serviceability is about how much banks will lend you or how much debt you can take on based on your current expenses and liabilities and your current circumstances. Having a regular and stable job or income goes a long way to enhance your serviceability.
Apart from the money set aside for real estate investments, you also need to consider setting aside a personal buffer or the ‘sleep at night’ factor to cover any family emergencies or contingencies like health issues, job losses, etc.
What’s in your strategy?
Your strategy should include the following information:
- Buying power and serviceability (seek assistance from a mortgage broker) – The first thing my mortgage broker will ask me when I am searching for a potential deal is where the property is located, property type, size and price. Armed with a deal profile and strategy, I am able to convey to him the required information and for him to give me an accurate financing information.
- Long term goals and timelines based your why, strengths, risk profile and financial position.
- Legal structure (e.g., trust, company, SMSF or individual) and related asset protection strategies (seek assistance from an accountant and lawyer). Changing ownership can be costly.
- Whether you are investing for capital growth or cashflow (seek assistance from an experienced mentor). (Please read this interesting article: http://www.theaustralian.com.au/business/property/home-owners-reliant-on-capital-appreciation/news-story/a9edec5d34dc44019c8434fc06f5f4a4 – Home owners are becoming more reliant on capital price appreciation as the cost of renting falls faster than the cost of owning a property)
- Property investment strategies (e.g., long term hold approach to value creation).
- Planned actions or tactics to support the chosen investment strategies (e.g., benchmarking and buying well below a suburb median with strong depreciation upon completion and rental income sufficient to cover the bulk of holding costs during asset growth).
- Deal profiles (or buying rules) for each property – The profile contains information about the target State, suburb, streets, property type, price point, etc. and it is given to local real estate agents to source the property for you (instead of you spending countless hours surfing realestate.com.au aimlessly looking for properties). Once the real estate agent has identified the pre-qualified property according to your deal profile, you will inspect the property, conduct the necessary due diligence (e.g., verify all facts, assertions, opinions and assumptions against evidence), make a written offer, negotiate the price, find a rental manager to manage your property and find a suitable tenant. Each deal profile will also identify the potential risks and mitigations. You move to your next real estate by developing another deal profile and you building up your portfolio, brick by brick!
- Succession planning (seek assistance from a family lawyer). Marriages and partnerships do break down. A strategy is required to mitigate this likely risk.
- Insurances (e.g., income protection, total and permanent disability, accidental death) (seek assistance from an insurance broker).
- Debt management, especially if there are outstanding liabilities and poor credit rating. Guard your credit file and constantly monitor it.
- Tax structure and minimisation (seek assistance from a tax professional).
- Exit strategies to enjoy the fruits of your labour (financial freedom).
We get distracted easily with tactical hell
Let’s face it, we get distracted easily. Having a well-articulated and written strategy will keep us continuously focused and on track to achieve our goals. It’s a systematic approach to find the right properties that will deliver the outcome we want. It will stop us from chasing after every shining thing that promises instant profits!
There are experts and there are experts
There are experts and there are experts. If you ask five experts, you will get five different responses and opinions as what your strategy and purchases should be because they have different skills, market knowledge and business interest. It is only through self-education and having your own goal-focused strategy that will save you from potential financial disaster and being led onto the wrong path.
Without a strategy, it is gambling or speculating
Without a strategy, it is gambling or speculating. We are leaving it to chance and investing in ways that we do not understand. We are easy targets for slick marketing professionals because of our ignorance (I know from first-hand experience!).
Real estate investing is unregulated
In this unregulated industry of real estate investing, you will come across experts who will give you FREE strategy sessions. Some will claim to be ‘independent’. I have attended a number of these sessions and they are usually sales pitches to buy their services or products at ‘discounted’ prices if action is taken by the end of the session. Often these seminars are fronts for developers wishing to offload stock to investors. If you want to go to these sessions, leave your credit card or cheque book at home – just go for the education experience.
Beware of free advise
The reality is that no one will give you something for nothing. There is cost associated with their time. They will make it up by selling you properties that are on their list or sell you their in-house services like buyers’ agent, mortgage brokering, mentoring programs, etc. They may also advocate certain locations and property types to buy because they are only knowledgeable in that area or they get commissions from selling certain properties in that location. That property purchase may not bring you closer to your goals. As the saying goes, buyers beware.
Investors must pay for good independent advice. The cost is well worth it.
For example, if that expert is a renovation guru, they are most likely going to recommend a buy, renovate and hold strategy for you. But if you are risk averse and have no interest in renovations, then you are going to be a miserable property investor. In fact, you will struggle and quit real estate investing all together. It’s like working in a job that you hate!
Don’t copy other people’s strategy
Don’t copy other people’s strategy no matter how good they sound. Your strengths and situation are unique to you alone including your risk profile and financial circumstance. These factors should be in your strategy.
Well-meaning friends give tips like “buy a cashflow property”, “buy and renovate”, “buy a duplex”, “buy in capital cities”, or “buy in hotspots”. Strategies that they share are so high-level and vague that they are useless because of their personal biases and it does not take into account your personal circumstances. We can be stuck in tactical hell and try so many things that we get overwhelmed and frustrated.
In summary, start off by educating yourself first and then develop your very own strategy based on your strengths, financial situation and personal circumstances. If you fail to plan, you will most likely plan to fail in real estate investing.
What’s your single most-important question about buying real estate?