Part I: Buy and hold, short-term growth and flips
Chapter 1: Negative gearing for long-term growth (buy and hold)
A rental investment, or buy and hold property, might have been the first strategy you thought of when you considered getting into property investing. Just buy a property and wait for it to go up in value! And during this time the tenant pays you rent every month. Sounds great! Buy and hold doesn’t require a lot of knowledge; all you need to do is be able to talk to a real estate agent and sign your name.
Most everyday property investors follow this approach, hoping the value of their investment property will appreciate (go up) over time. It is a hands-off strategy that requires little effort. What’s the most common way to purchase a buy and hold investment property? Using negative gearing, which we will explain shortly.
But before you even begin to think about choosing a strategy, it’s time to take stock of your own circumstances. So that’s where we are going to start …
Getting started
Two of the key elements to consider when you are at the very beginning of your property investing journey are:
where you want to get to
where you are now.
Without goals it is difficult to have direction on your journey and you can wander around like a lost puppy: aimless, bumping into things, biting off more than you can chew and occasionally falling over. And if you haven’t taken stock of your current situation, you will be lost before you even begin.
So let’s have a look at addressing these two issues. We’ll start with setting goals, because thinking about where you want to be will inspire you to take action.
Setting goals
An essential part of any successful investment plan is setting goals. In the preface we looked at establishing your why, as this will give you your ultimate goal: spending your days on the beach, buying a Ferrari or telling your boss what you really think of him as you sail off into the sunset on your new yacht, never to be seen again. (It might be a good idea to go back and read this now if you’re not a person who usually reads the preface!)
Shorter term goals
Once you have established your why, you must work out how you are going to get there. A great way to do this is to set some shorter term goals. Rather than focusing on a target that is a long way in the future and can seem difficult to reach, you can take smaller, planned steps along the road that you know will lead to your why.
You can create these shorter term goals by asking the question, ‘What do I need to have achieved in …?’ For example, working backwards from 12 months it would go something like this:
What do I need to have achieved in 12 months to ensure I will reach my why?
What do I need to have achieved in six months to ensure that I will achieve my 12-month goals?
What do I need to have achieved in 90 days to ensure that I will achieve my six-month goals?
And so on for 30 days and then seven days.
This is living to a plan and planning with the end in mind, and is a critical difference in perspective between Joe Average and Richie Rich. It’s very difficult to map out a path to your ultimate destination if you start by focusing on next week, but working backwards from the longer term goals first will clarify what needs to be done in each time frame and allow you to build incrementally towards your target once you get underway. And if you can see yourself achieving the small goals you will have more faith that the big goal is achievable as well.
SMARTIE goals
You may have heard of the SMART method of goal setting. Well, we’re even smarter than that — we use a SMARTIE goal-setting process! Let’s have a look:
Specific. The goal must be clear and well defined.
Measurable. The goal must be quantifiable, so that you can answer the question, ‘Did I reach this goal?’
For example, ‘To learn about property’ is not a quantifiable
goal; ‘To study property for three months and select a strategy’ is quantifiable.
Achievable. You must be able to reach the goal if you put in the effort.
Realistic. The goal must take into account your circumstances and resources.
Time-bound. You must have a fixed deadline.
Integral to self. The goal must fit with your values and beliefs.
Emotional. You must have an emotional attachment to the
goal, otherwise you won’t have the motivation to pursue it.
So why are these SMARTIE goals smarter?
SMART goals are intellectual goals that don’t fully take account of your passions and desires. But SMARTIE goals take into consideration your values and beliefs and the passion that you have to achieve them. Goals that you are emotionally attached to will help you keep going. They will crystallise your thinking and spur you on. This belief in your goals is vital to your success, especially if times get tough.
Write your SMARTIE goals down and review them regularly. If you’re on target, great! Keep going. If not, have an honest look at why you might be falling short and change what needs to be changed. If you are not reaching your short-term goals you probably won’t reach your why, so address any problems immediately.
Reward yourself along the way for reaching significant milestones, such as a six-month goal. Nothing extravagant; you should be trying to save money! Go out for dinner and a movie with your partner, or spend a day at the beach. No, just completing your daily to-do list doesn’t warrant a bottle of champagne!
Where are you now?
Setting your goals will help to show you where you are heading — but how can you get there if you don’t know where you are now? Knowing your destination, and even having a map, are useless if you don’t know where you are starting from.
Get a grip on where you are financially. This includes knowing your cash/equity position and your borrowing capacity. To work these out you must know about your income, loans, credit card debts and limits, living expenses, savings and expected expenses in the future. It’s like using a compass; it can point you in the direction of where you want to go, but you can’t plot your course if you don’t know your current coordinates.
Assessing your financial position
You need two things for almost every property deal: cash and borrowing capacity.
When borrowing money, lenders won’t finance all of a property purchase unless you can put up other properties or assets as additional security. Assuming you can demonstrate your ability to meet the repayment obligations, most lenders will be comfortable lending up to 80 per cent of the purchase price or assessed value of the property (whichever is lower). You might be able to push this to 90 per cent or maybe even 95 per cent depending upon the lender, your personal circumstances, and your willingness to pay extra for a thing called lenders mortgage insurance.
Whatever percentage of the purchase price you can borrow, you’ll somehow have to cover the shortfall between the loan and the price of the property. You might need to have 5 per cent, 10 per cent, 20 per cent or more of the price of the property in cash, plus some extra dollars to cover stamp duty and other costs (this will be discussed in detail in chapter 6).
If you have built up some equity in your home, you may be able to draw down on the equity to help you buy an investment property. The banks will be very happy to help (in fact, they will be racing to your door). Using the equity in your home can become complex and risky though, so it’s very important to assess any property investment carefully and think about what it might mean for your own home if the deal goes badly.
How much cash can you get your han...
