Did you know that only 6.52% of Australians own an Investment Property and only 24% of this group own more than one?
At Financial Advisers Australia (FAA) we are especially proud to be able to offer advice and information on both Securitised Investments and Investment Properties supported by our comprehensive range of associated services.
Many property investors have a broad idea of their plans for the future. You might know that you want to own five properties by a certain age, for instance, or that you wish to retire on your property portfolio in 10 years’ time.
But to be a truly successful property investor, you need more than ‘big picture’ goals and ideas. They’re a wonderful place to start, but you also need to know the steps you should take to turn your dreams into reality. You need a plan. And the best place to start is by covering your short-terms goals with a five-year plan.
Failing to plan is planning to fail
We all know or have heard about real estate investors who have been forced to sell some or all of their properties, particularly in recent times.
It can happen for a range of reasons. Some investors were overextended or highly leveraged, and they didn’t count on finance markets drying up so quickly – they were used to refinancing and gaining fast access to lending, and when they couldn’t get finance, they had no back up.
Others lost their jobs or income sources due to the slowdown in the economy and found that they could no longer afford to pay for their investments. Others still are impacted by situations that completely catch them off guard, such as divorce and family illness.
These kinds of situations can occur at any time, and if recent times have taught us anything, it’s that the biggest mistake we can make as investors is to fail to plan. We know it’s a cliché, but failing to plan really is planning to fail, particularly when you’re dealing with large amounts of money.
With the right preparation and risk mitigation strategies, you can protect your investments and ensure that you keep moving forward, regardless of what the market is doing. You need to prepare for the worst, while hoping for the best – and to achieve this, you need a plan.
As an investor, it’s important to make sure that your actions match your intentions – and having a five-year plan will help you do just that.
Your five-year plan
So precisely what does your five-year property investment plan look like?
Think of it as your personal road map to help you make all of your property-related decisions, from buying and selling to renovating and refinancing. If you don’t have one, it’s time to make one – now! If you do have one, now is the perfect time to revise it.
It should be a flexible working document – one that can be changed and updated to reflect changes in your lifestyle and situation – and you should aim to review it every six months or so, to ensure you’re still on the right path. Most of all, it should be tailor made to you and your financial position, so that you can be sure you’re making every last dollar work for you.
Sound a little daunting? It doesn’t have to be. Let FAA prepare and manage your plan for you. The only thing you need to do is work out your goals ready for retirement.
For example, if you wish to own two investment properties in five years’ time with a total of five properties in ten years; your five-year plan should then spell out just how you can achieve that.
There are many factors that will influence your five-year plan, and they can loosely be grouped under three headings: finance, family and lifestyle.
Finance checklist
The ‘finance’ arm includes external influences such as interest rate movements, and internal factors, such as your income and your ability to gain loan approval.
The major point here is serviceability. Rents are likely to rise slightly each year, which will offset any increases in interest rates.
You should consider:
• Do you and your partner have steady jobs?
• How much do you have in savings in an emergency buffer account?
• Currently, how leveraged is your property portfolio?
• If rates go up 1%, will you still be able to afford to maintain your investment properties?
• If rates go up 2-3%, will you still be able to afford them?
• If you plan to buy additional investment properties, where will the deposit come from?
Your answers will help shape your financial goals for the next five years and beyond.
Family checklist
You might be able to afford your portfolio now, but how will you cope when your mortgages cost more due to rising interest rates – and your two-income household just dropped to one income, because you’ve just had a baby?
You should consider:
• Do you plan to have a baby or expand your family in the next five years?
• Will adding to the family impact your income stream? If so, how do you plan to replace that income?
• How will you cope with the extra expenses that expanding your family brings with it?
Your answers to these questions will feed into your financial decisions and will help you work out a more realistic budget.
Lifestyle checklist
This group covers all of the factors that we often forget about when we’re making plans and working out our finances, from health and wellbeing through to travel and lifestyle choices.
You should consider:
• How often do you travel for leisure, and how do you pay for it?
• If you increase your investment portfolio, could that have an impact on your future travel plans?
• Do you plan to upgrade your car in the next five years?
• Do you have savings set aside to cover health issues such as undergoing major dental work, which can cost thousands of dollars?
Financial Advisers Australia are big believers in enjoying your lifestyle, and we don’t think anyone wants to get rich by living off baked beans, but you need to make sure that you’re living within your means. If you’ve got your heart set on that European holiday, perhaps you need to revise your end goal. Whatever you decide, the most important thing is to prepare and budget ahead accordingly, so that you don’t overextend yourself and your finances.
That’s where FAA comes in, we will assist and provide you with your plan and then help you manage it so you stay on track with your future goals. A plan without action is a daydream; action without a plan is a nightmare!
Getting started with some Education
A consultation with one of our property specialists will show you how to build a balanced portfolio of high quality property using either the equity you’ve accumulated in your home or we can assist in helping you get started by either saving or using a family pledge. You will also learn how ‘Negative Gearing' can move through ‘Neutral Gearing’ into ‘Positive Gearing’ to then further develop a much larger Investment Portfolio.
Put simply, you can use a well structured investment property combined with your income as a vehicle to create wealth. The aim is to own the capital growth your property will experience over the long term.
How Much Will it Cost Me? 
In most cases there will be no need for a cash deposit to secure the property and the actual cost to you on a weekly basis needs to be within your savings and budget targets.
Benefits of Buying an Investment Property using FAA
The ease of having your FAA Consultant look after the entire process for you; understanding exactly what your investment objectives are; having both the tenant and the tax‐man helping to provide for your retirement; the comfort of being able to walk up and touch it or simply drive by once a month.
Peace of mind alone is not enough to qualify property as a good or great investment; it must also have the ability to meet your growth, income and tax management expectations.
Investment in residential property is one of the most tax effective and transparent ways to accumulate funds for retirement. By examining your property holdings you can calculate exactly when you can relax or wind back your work commitments.
It is not our intention to demonstrate that property is the best performing most solid or reliable investment sector ever invented. That would simply be untrue; just as it would be untrue to suggest that any other sector was the best all the time. Property like other strategies has its advantages and disadvantages; however it does have tangible and practical benefits that other investment classes lack.
We certainly do not claim that property is free of pitfalls or risks. We do however believe that with the correct selection process and an educated and conservative approach, the common causes of failure can be eliminated, reduced or managed.
In simple terms, for very little out-of-pocket cost, you can have a very large investment growing for you!
Some Key Factors considered in the Property Selection Process
Within the Property Selection process, it is important to consider the following issues:
• To select properties with above average growth prospects.
• To select properties with a reasonable rental return.
• To select properties that are more likely to be trouble free for our clients.
• To select properties that match each client’s individual needs and financial circumstances.
Investing in property should be no more personal than investing in the share market. The logo of the company or the colour of their letterhead is not considered important when an investor considers which share to buy. Factors that are
important are the cash flow and profit of the company, the expected return on investors funds and the unique appeal of it’s product or service. Property needs to be considered in the same light!
Satisfying these criteria is not so simple. We use a 20 point check list as a basic guide to property selection. This list eliminates about 92% of the properties available for consideration.
Property Location or Position
Areas of future and current high demand are a priority. These “pressure points” are usually locations where for various reasons, land or homes will prove to be scarce or more desirable in the future. Location and region selection is not just a matter of looking at history and easily identifying previous strong growth areas. We take great care to research the areas to ensure that the next 20 years has strong growth prospects. This growth can be linked to solid local government, supportive of development and with a commitment to investing in public infrastructure, such as roads, schools, universities and commercial development. The areas must have a strong draw for the potential tenants; either residential or tourist style tenant.
These areas can either be new suburbs of growing regions where the value of the property has no “premium” attached, but with continued development, will attain above average growth as the area fills. They may also be older currently established areas which favour the international trend for an urban renewal of the inner city suburbs with medium to high density Town House developments.
Design & Type
History has shown that the simple designs work the best. They appeal to a wider tenant base as well as offer cost effective construction. Whether we are looking at 1 bedroom apartments or 4 bedroom family homes, the design must be appropriate to the suburb and local area.
The quality of the construction must be of the highest standard, with above average inclusions.
These factors have a major impact on the future maintenance, the ability to attract quality tenants to the property and the tax effectiveness of the whole package.
Value for Money
We do not look for bargains, we do insist on value for money. This comes from never compromising on the key selection criteria.
A bargain usually has some unforeseen risk such as impending oversupply or rezoning, or perhaps a road relocation. These “bargains’ carry an increased risk factor especially in the short term. Any of these factors has the potential to deter a tenant or potential purchaser.
Property Management
We work with property managers who are extremely proud of their management track record. Against an industry average of between 2% - 5% vacancy on residential and 25% - 50% on resort style accommodation, the management we work with consistently averages less than 2% vacancy on residential and 10%-15% on resort style accommodation.
Professional Service
Because we have such a wide range of property locations and styles, we are well suited to selecting one or two properties that will better match our client’s needs. This “matching” process will include a comprehensive review of your current and future personal and financial circumstances.
Each property will be based on a medium to long term approach to property investment. We aim to build a complete portfolio with each of our clients and believe that most Australians can aspire to owning at least 3 investment properties over their working life - but unfortunately very few will even look at their options let alone implement them.
20 Point Selection Process
1. Must be new
2. Highest negative gearing advantage
3. Must be available to build on, nearing completion or complete
4. Must have high quality construction, finish & inclusions
5. Each specific property must have strong rental demand
6. The area must have a continued strong rental demand
7. The area must have identifiable support for above average growth
8. Must be close to public transport, rail, buses, major arterial road links
9. Must have a high standard of landscaping and project maintenance
10. Reliable & experienced Body Corporate management
11. Bank & Insurance Company approval
12. Close to a major city
13. Must be located in or near areas of high employment
14. Strong street appeal with 2 spacious living areas
15. Ready to move into, with phone connection, TV aerial, fly screens to windows, drive ways, clothes lines, storage,
car accommodation and window coverings
16. Preference for Brick & Tile
17. Must be close to waterways or beaches, where appropriate or possible
18. Close to shops
19. Schools, day care and other educational facilities must be close
20. Located in an area with proven property management
Investment Property FAQs
1. What if interest rates rise?
We fully expect interest rates to rise. However by fixing your interest rate, you are insulated from the rise. As interest rates do rise, we should see an increase in rental income which in turn actually improves your financial position considerably.
2. What if we can’t get a tenant?
As a property investor it would be foolish to expect your property to be perpetually let. We advise all clients that they should expect periods of vacancy. The Property Managers we work with average a 2% vacancy rate, which equates to approximately one week per year. By setting reasonable rental income expectations for high quality property, periods of vacancy longer than the average should be rare.
3. What if inflation stays low?
Periods of high property growth are sometimes associated with high inflation. All our projections are based on a growth rate of 2%above inflation. Over the last 40 years this has proven to be conservative “Real Growth”. We have found that even in periods of low
inflation, there have been pockets of property that have well and truly outperformed the averages and have exceeded the 2 %
benchmark real growth. It must also be clear that even a real growth of 2% on a $450,000 property is $9,000 above inflation.
4. What if the property doesn’t grow in value every year?
It is unreasonable to expect any property to grow in value each and every year. In fact the growth may be quite flat for some years and then in periods of high economic growth, the property may experience 10% or 15% over 2‐3 years. This is why we do not try to pick the “Property Cycle” but rather take the long term view that over any 10 to 15 year term, property will average a solid real growth above inflation. It is important to be in the market well before any extreme growth. It is equally important to hold your property even when the market is dropping or flat.
5. What if my tenant damages the property?
We strongly recommend Tenants & Landlords Insurance which covers damage to your property.
6. What if the tenant does not pay the rent?
Tenants & Landlords Insurance covers loss of rent due to damage, non‐payment of rent and the breaking of lease agreements.
7. What if the Govt changes the tax laws?
Successive Governments have made it very clear that they will not change the tax laws that affect negative gearing. They will cast a close eye over those investors who use this investment strategy, which is why our service is so crucial to property investors. We work with accountants and tax experts to ensure that your property has the highest LEGAL tax deductions.
The Australian Government cannot afford to meet the demand for rental accommodation with Govt housing. It fully realises that if it removes the attractiveness of investing in residential property, the building industry will suffer a major setback as it did in 1985 and it
will have a housing shortage for the rental community that it will not have the funds to meet.
8. What if I lose my Job?
This is an insurable event and should be discussed with your adviser.
9. What if I don’t want to use a property manager?
It is your choice.
10. Can I lose my house?
The chances of any bank selling your own home as a result of an investment property investment is extremely rare. With the insurances available and our Property Selection process, the risk is low.
11. Who controls my investment?
You do.
If you would like more information or to come in for a free no obligation appointment please click here.
Prepared by John Hehir Financial Advisers Australia (FAA).
