POSITIVE REAL ESTATE BEGINNER S GUIDE TO PROPERTY INVESTING

Transcription

1 POSITIVE REAL ESTATE BEGINNER S GUIDE TO PROPERTY INVESTING

2 Introduction If you re looking to head down the path of property investment, it s not necessarily harder for beginners in comparison to those with more experience. In reality, the only difference is education. For first-time investors, it can seem a bit overwhelming to begin with especially when so much negative press forecasts impending doom and gloom around every corner. However, when you ve got an experienced team at your side, the process can be profitable and rather exciting! That said, while you may be tempted to join enthused investors who rush into the housing market as it surges ahead, you ve got to be a bit cautious. After all, you do not want to sink on your first purchasing voyage. It s all about understanding the difference between negative and positive geared property, managing your finances and ensuring you have the support of the right people. It s important to plan before setting sail, and to consider the following: 1. SURROUND YOURSELF WITH THE RIGHT PEOPLE Some things should be done alone. Investing, however, is not one of them. Striking out on your own is an antiquated way to do business. A better (and smarter) way is to surround yourself with a team who can support you as you move through your journey to financial success. Your passage will be much calmer if you pull together a team of professionals who can guide you through rough waters, step by step. You would do well to seek advice from experienced conveyancers, finance brokers, buyer s advocates, solicitors, accountants and depreciation experts, to name but a few. It s often preferable that these specialists be personally involved in the property investing game so they can better assist you in achieving property success. When you surround yourself with mentors who are property-focused who are investors themselves the advice you obtain will be well suited to your unique position as a property investor. For example, a superior accountant will know the smartest way to find you more cash flow to support your property portfolio. 2. SEEK PROFESSIONAL ASSISTANCE Investment agents are focused on your success looking out for your interest in the market. A good agent can help in many ways, from making you money to helping you to explore new areas. Help select the best property for your needs and strategy Help expose what the selling agent hasn t Guide you through the buying process Introduce you to ideas and areas that you may not know Connect you with a trusted team Prepare detailed comparable market analysis on properties Prepare purchase offer Negotiate on your behalf Help close a deal 3. LEGAL ASSISTANCE You will need to appoint a solicitor or conveyancer/legal representative to ensure that the contract is in your best interest and does not contain any unsatisfactory terms. Make sure you know your legal representative s qualifications and exactly what service they are offering. Their role is to: Facilitate council, strata and company title searches Beginner s Guide To Property Investing - 2

3 Arrange for the exchange of contracts Give advice on the property contract Order pest and building inspections Negotiate with the vendor s solicitor on your behalf Arrange for the settlement process Deal with any difficulties that arise during the settlement period. Feel free to contact us and ask about our recommended solicitors. 4. MANAGE YOUR FINANCES As a beginning property investor, it s unlikely that you will require an accountant to set up rigid structures for your property portfolio. Experience has shown that accountants and planners often like to set up company and trust structures for individuals who don t even own real estate. The reason they often do this, unfortunately, is to benefit their own bank account, through the subsequent set-up fees they will charge. In general, first time property investors buying their first handful of properties don t need complex structures, however as you move through your investment journey, it is prudent to start to manage your buying protection by working with a property-focused accountant. When you are ready for the needs of a financial planner or accountant they can: Give you advice on buying structures Strategically keep you finance ready Create a tax effective vision for the future Help with tax losses and gains Help with distributions and family asset planning Do some research and find a financial planner or accountant who suits your needs as a property investor, or contact us and ask about our recommended finance advisors. 5. PROPERTY STRATEGISTS WITH MENTORING PROGRAMS Strategists will help you determine where you are at right now within your property portfolio and recommend the best and safest type of strategy for you to adopt as you move forward with your investing. As a coach, strategists will act as your partner on ideas, deals and principles to get your portfolio moving in the right direction. Strategists are very motivating people. They will encourage you helping you to push right past the self-imposed boundaries that are holding you back from achieving the success that you deserve. When you meet with a mentoring property strategist you can expect to: Discuss life goals planning Have an analysis of property deals Get connected with a trusted team Concentrate on the core (property) Learn how to keep emotions out of property ideas Do not employ an accountant who doesn t own property. They show a lack of knowledge on the ability to acquire wealth through property investing mainly because they themselves are not wealthy. Come along to a Property Investor Night to meet your expert property coach and arrange a one-on-one appointment with them to discuss your financial goals. Beginner s Guide To Property Investing - 3

4 6. SET YOURSELF UP FOR SUCCESS Building an investment portfolio is much like building a ship not only do you need to know the bow from the stern, you ve got to know what your vessel can and cannot be expected to do. As an investor, to achieve success you must grow you must plan for the future. It s difficult to establish a plan, however, if you re not sure where you want to go. After all, how will you know when you ve arrived? Property investing for beginners can be made much easier once you understand all of the ins and outs of the process. What Happens if I Buy More Than One Property Per Year? When you buy more than one property per year you speed up the acquisition phase of your investing journey. We all go through an accumulation phase of owning assets. The more that we can control and balance, the more money we can consolidate into the future. There is absolutely nothing wrong with buying properties more quickly than one per year if you define what you want. No doubt, it s also important to consider what your extra money buffer looks like and what your credit file looks like. Exposing yourself to properties needs careful consideration from funding elements, so don t expect to buy a few properties in a year while getting hits on your credit rate by applying for a credit card or a new car. If you can, balance your portfolio and keep a buffer. The implications are simple. You are doubling down on a good strategy because you re buying real estate! Be diverse, choosing one capital growth property and one cash flow property. Choose properties in different areas as well. What is the Best Way to Manage My Credit Risk? You need to examine risk in two parts. One part what your funder thinks of your risk. In this situation it is better to not cross securitise your home and your investment properties. You don t want one bank to control your loanto-value ratio (LVR), redraws and money. You want to keep your portfolio liquid to sell one day. Do not cross your loans. This is why we separate the lender on your home from the lender/s of your investment portfolio. The other risk is mitigated by having a buffer. It s smart money management to keep a good chunk of cash liquid to pay for any unexpected bumps along the way and there will be bumps. Banks will look at your risk profile by considering the following: Age Proof of savings Stability of employment Other securities Net worth Employed or self employed Rental incomes Beginner s Guide To Property Investing - 4

5 How Will the Speed at Which I Build My Portfolio Hinder My Serviceability and Borrowing Capacity? To keep your serviceability from dropping, as an investor you can choose properties which have higher yields. This can also help improve your borrowing capacity as well. It is a myth to say that you cannot own numerous properties because you run out of servicing. Remember, the goal is 10 properties, so we do NOT need 10 positive cash flow properties in regional or risky towns. What we do need is to strike a balance. By diversifying our portfolio, we spread our risk and have a much better chance of maintaining serviceability. What Happens if I m Struggling to Find Tenants? If you ve got the right buffer set up, you will overcome any vacancy rates. Most vacancy rates in New Zealand are low. Other than a few isolated incidents we are not seeing an oversupply in the market, so properties should rent, if you price them to rent. Flexibility is important. The real estate world is continually presenting us with surprises, many of them unpleasant. Some people like a certain rigidity and do not tolerate change well. Inflexibility is correlated with a high level of impatience a trait which will not serve you well in property investing. In practical terms, one example of being prepared to be flexible within real estate is when you have a vacant property. Although getting a high return is important, being flexible to dropping the rent a few dollars to get a lease signed leads to a happy, less stressful and faster outcome most of the time. Yet many investors become inflexible and that leads to blame and a poor property experience. Why is Cash Flow So Important? Are you wondering whether you should buy positive cash flow or capital growth property? The answer is both. Both add value to your portfolio and can help you reduce debt on your home loan. If you want to accumulate wealth for the future, then a blue-chip capital growth property will do that for you. The next question then obviously is, how do you go and buy that capital growth property and create wealth? The answer is through cash flow. You can create cash flow by buying good, positive geared properties, which improve your buying power by putting money back in your pocket. They also help your serviceability. This in turn means you will be able to buy a high capital growth property! Successful investors have mastered the fine art of balancing their portfolio, which allows them to continually move forward in building their wealth. The statistics show that around 5.4% of New Zealanders have one investment property and around 2.5% of the population own more than two properties! Why do you think that is? Mostly because people get stuck their cash flow is low and they really don t know how to move forward or they are simply not confident enough to keep investing. When you hit the mark of between five to six properties you are certainly setting yourself up for a very comfortable future. If you then acquire between six to ten well-chosen properties, this is where you will find financial freedom. However only 0.005% of New Zealanders own 6 or more properties! Beginner s Guide To Property Investing - 5

6 Should I Buy a Negative or Positive Geared Property? Following is a brief description of both gearing strategies to help you understand the benefits of each: POSITIVELY GEARED PROPERTIES: A property is said to be positively geared when the rental return is higher than your loan repayments and outgoings. Positive cash flow properties are self-funding and are considered to be a conservative investment strategy that provides an income with exposure to the prospect of capital growth. Bear in mind that with positive gearing there is the potential that tax will be payable on the net income (after the consideration of depreciation and other tax deductions). Positive gearing is beneficial when an individual does not have surplus cash flow to fund income losses during the ownership period or other income to offset losses. NEGATIVELY GEARED PROPERTIES: A property is negatively geared when the rental return is less than your loan repayments and outgoings (placing you in an income loss position). There is, however, the underlying expectation that the accumulated losses will be more than offset by the capital growth on the property. In this circumstance the rental return is not considered as important in the decision process. The key benefit associated with negative gearing is that the loss associated with the property ownership can be offset against other income earned, reducing your assessable tax income, thereby reducing your tax payable. The result is that the cost of owning the property is being funded by your tenant (in the form of rent), the tax office (in the form of tax savings) and your surplus cash flow. Ultimately most investors will aim to be positively geared in the long run. Generally high taxpayers choose the negatively geared investment option to maximise their tax returns and benefit from the long term capital growth potential. Investors who are closer to retirement or in a lower income bracket may choose positive geared properties to maximise their income potential. Make Sure You Choose the Right Capital Growth Property Look for market cycles that are ready places which have not grown for a while and get in at the right time. Look for property that you can add value to through a variety of ways including time in the market or minor renovations. Look to buy in places where huge infrastructure spends are being injected and invest there. Considering these factors before purchasing an investment will ensure you make a good profit! Self-Limiting Focus Some novice investors tend to develop an image in their mind s eye of the kind of property they believe suits their image of themselves as an investor. It s also an image Beginner s Guide To Property Investing - 6

7 which typifies the way they want the world to view them as well. In some ways, the investor begins to identify with the image, which can lead most new investors to concentrate on one area or one deal that matches their particular worldview. This practice, for many of us, has been cultivated since birth. Self-image is a curse in property; it denies you one basic principle: throw a wide net out into the market and see what you can catch. What you catch may not be what you identify with, but it will more than likely be profitable. For most of us, we rush into the first property purchase based on a fear of loss of not being involved. We believe there isn t enough property to go round. These fears are unfounded. Become nonchalant about property and don t focus on just one deal. Take a look at a minimum of twenty properties simultaneously! Make offers on property constantly. Make low offers. See what you can fish out. We need to throw off that image of finding that one, right property and discover the ability to look at multiple deals at one time. Buyers too often create a blind spot to opportunity by adopting a narrow focus. Undoubtedly, one of the biggest mistakes buyers make is to become snobbish about a deal. indication of how much we can borrow. This is often known as a pre-approval. For example, a lender may tell you that, based upon your deposit amount, they will lend you $300,000. So then, of course, you go off and put a deposit down on a $300,000 property. What you may not realise is that the bank or lender reserves the right to change their mind if they deem the property, in their opinion, to be a risky investment. For example, the bank may actually have a lending restriction on an area or a type of dwelling. This is not an uncommon event many people get into strife this way. Preapprovals are good to obtain, but they are just a guideline of what you can borrow. They should not be relied upon. TAKE CONTROL How to master property investing, find financial success and overcome roadblocks. It s important to understand that there is a ratio for everything. For a batsman in cricket, it s called a batting average. The best cricketers in the modern game have an average of around 45/100. Every time they bat, they get 45 with the high aim of 100. In property it s one out of twenty. For every twenty offers you make, you will get one come back, and that raises a level of interest that is worthy of your hard earned investment money, so you need to learn to make offers. Buying Property Based Upon a Pre-Approval Naturally, when we want to buy a property we see a broker or a lender, who will give us an Beginner s Guide To Property Investing - 7

8 Put together a combination strategy which includes both cash flow and capital growth. This will provide you with the serviceability as a borrower and will allow you to continue to move forward, so you can buy more properties, borrow more money and keep building your wealth. Immediately build your cash flow up from your wages, rent return and tax deductions, especially if you are a PAYE earner (don t wait until the end of the year to claim these claim them weekly if possible). Ensure you have the right finance solution and a personalised finance structure. Negotiate better interest rates and save your money immediately (i.e. shopping around for lower interest rates will absolutely improve your cash flow)! Set up an offset account and learn how to use it correctly. Once you ve set your account up, find the right positive cash flow properties that create excess cash flow that can then assist you to buy a high capital growth property. In simple terms, a positive cash flow property may actually pay you an excess amount of money after all your outgoings are paid. For example, let s say that a property for $170,000 which is renting for $300 per week, could actually improve your income by $1000 per annum over and above paying for all property outgoing and the interest rate or loan you have. This is known as positive geared property. However, these properties may be high yielding yet may offer less capital growth. Conversely a property that may be in a better or more desirable locality may not carry a high rent over the purchase price. For example a property for $400,000 may only rent for $400 a week. You may actually need to contribute money from your wage to support the property. This is known as negative cash flow property. Don t let the negative cash flow be a reason not to purchase, as often negative cash flow properties grow in value expressly. Once you are trained on markets, you can buy with the knowledge that it s likely that a property in a negative cash flow market will grow, soon after the purchase. Would you risk $50 a week on a property that may go up by $50,000 over two years? I ll let you be the judge. Seize control of your own destiny. Objectivism states that we can perceive the world through reason alone. This means that if you have an unachieved goal, you cannot blame your parents, your teachers, your friends or anybody else. Success and failure rests entirely with you. Once you begin to understand that property investing for beginners offers the same formula for success as it does for experienced investors, you will being to see things a bit differently. As captain of your own ship, the power of choice is within your grasp right now. Take hold of the key fundamentals we offer and chart your course for financial independence now, rather than someday. When you take advantage of the tools that we offer, you will grow quickly from real estate novice to real estate investor, and reach your goals much sooner than if you tried to go it alone. If you require further information regarding property investment, don t hesitate to contact the team at Positive Real Estate today. We run seminars across New Zealand and also offer comprehensive mentoring programs, helping people to secure their future via real estate investment. Register for a Property Investor Night to learn more about the New Zealand property market and how we can assist you to achieve your goals. Positive Real Estate New Zealand National phone number Our advice is of a general nature only. Obtain advice from licensed professionals to determine if similar results may be achieved by you. We do not guarantee future results.