Question:
I have just started investing in property. I want
to grow my property portfolio as fast as possible. How do you recommend I
achieve this while minimising risk? I currently own my primary place of
residence with about $220,000 remaining on the mortgage (valued at $450,000)
and have just used this equity to purchase an investment property valued at
approximately $585,000 (will rent for approximately $540 per week). From here I
would like to purchase additional 4 - 5 properties over the coming 5 - 10 years.
My answer:
Thank you for asking this question. Achieving solid investment outcomes
only happens via disciplined strategies with a long term outlook. The trickiest
part of investing is avoiding making bad behavioural decisions based on the
emotional.
Successful investing starts with realistic expectations, respecting
the investment fundamentals and hiring a third party professional who will draw
your investment plan and will ensure you stick to it.
You want to buy one property every year, or every two years – how? If you
plan to put cash into each property (minimum deposit plus costs on each
purchase) you’ll need to save hard. What is your cash flow position? If you
want to keep using equity (by relying on future growth) your goal is not
realistic.
From your question it kind of looks like you’ve made up your mind, so if
you do go down that road, here’s a few things I would consider and encourage
you to implement in your plan.
Avoid acting emotionally
Partner with a third party professional who can
draw a time and dollar specific plan in order to help you making objective
decisions about your future. This may sound basic but hiring an experienced
professional with the objective point of view is money well spent.
Diversify
If you’re going all property (which I would not endorse) then
think of different types and locations. If you’re narrowing your investment
strategy to only one idea, you’re putting all your eggs in one basket - all
your planned assets would end up in same property. If you don’t have exposure to different assets
you have no backup plan. Also, consider investing in equities to increase an
exposure to different assets in your portfolio.
Avoid euphoria
Don’t buy what’s popular, otherwise you possibly lose the
sense of risk (when you’re worried that others are making more money than you,
you’re in the euphoria zone). It’s the opposite of panic and capitulation and
it’s equally dangerous. False expectations are set, your behaviour is
completely emotional and the investment decisions are not being thought
through. You also lose the sense of value and you end up buying overpriced
assets.
Have plenty of equity
Protect yourself against unforeseen events
(interest rates, loss of tenants, etc.) and make sure you put at least 20% of
cash into each property. This will likely go against your goal of growing your
portfolio ‘as fast as possible’, but it’s crucial you don’t expose yourself to
high debt.
Don’t speculate
Take a long term view and look for an increase in value
over time, rather than chasing short term price movements. You may still think
you’re investing but you haven’t realised you crossed the line. If you’re looking
at short term price fluctuations, you will end up burning your fingers. Don’t
overthink the process; keep things fairly simple, an excitement belongs to
Vegas.
Cover yourself and your plan
Have relevant protection strategies to
protect your ability to earn income (may need it if property income doesn’t
meet your expenses) and to have available cash to deal with the unexpected without
pulling money out of your plan.
Lastly, you’re not mentioning this in your question, but what’s your end
strategy?
Assuming you reach your goal of owning ten properties, what do you
plan to do with them? Keep them to fund your retirement? Sell them one by one
to free up cash? You need to think about this before you start so you won’t get
stuck at the end (you may have unnecessary problems with tax, liquidity –
access to your money, reliability of income etc.)
Hope these tips help you clarify your points of focus. I believe you’ll
consider them carefully before making any investment decisions. Shop around and
invest in quality financial advice. It will be worth your while to look for
someone who will focus on the dominant determinant of your financial outcomes –
your investment behaviour.
Best wishes,
Michal Bodi
