Which property investing strategy do you focus on as an investor?
What if you’re starting out or you’re a more experienced property investor wanting to accelerate the growth of your property portfolio? Do you use a positive cashflow property investment strategy? Why positive cash flow properties?
Firstly a positive cashflow property investment strategy is one where the rental income from property exceeds all costs of ownership, including interest, council rates, insurance, property management and any other holding costs.
In other words, positive cash flow properties can actually put money in your pocket each month and as a result is paying you to hold the property. Get enough properties like this and you could replace your income and retire, if that’s your plan?
Positive cash flow properties sound almost too good to be true, right? Many property investors can’t believe positive cash flow deals exist in today’s property market. They believe cash flow property can’t be found as property prices went up faster than rents.
In fact, great positive cash flow properties can be found right now. If you understand how to look, what to look for and the secret to choosing the right positive cash flow property in the right area, you can get positive cash flow and capital growth in the same time…
Positive cashflow property investment strategy…are you an investor worried about what’s happening to the value of your properties?
Are you stuck or hitting a financial brick wall with you portfolio and can’t seem to move forward?
Fortunately there is a positive cashflow property investment strategy for making significant money which doesn’t rely on market-driven growth for success, and actually allows you to keep borrowing more to get multiple properties.
Understanding how to find and invest in the right kinds of positive cash flow deals allows you to buy literally dozens of properties, and effectively get paid to hold property regardless of what direction the property market goes in today’s property market.
Because in a flat or falling market, which is the market we are in today, do you want to see real-life current market examples of deals where you can buy properties with rental returns above 10 per cent, delivering substantial positive cash flow?
P.S. Would you want a massive instant equity gain? How about buying into a fully rented property, which delivers positive cash flow from day one? What if you can even subdivide the property to add more value…
Property investment business…are you entrepreneurial?
Property investing is a business, would it make sense to be in a strategic position and develop a business plan before you even consider making any property investment? So the next question is how does running a property investment business work?
Whether you own one property or a hundred, a property investment business with plan helps manage risks and rewards of your investments. If you’re structure your investment plans as well thought out, especially when demand for mortgages is higher than supply…
You’ll be in a stronger position and more likely to secure the finance you need. A property investment business with plan means you can effectively leverage lenders, brokers,
property consultants, letting agents, financial advisors and property tax consultants.
Do you have a keen eye for property opportunities? Want to unlock and unshackle the chains to your financial freedom? Well, background analysis of your purchases must be concise and accurate. Here’s one reason why?
Because the level of gambling or rolling the dice which most people approach property investments these days, you want a reliably proven system, which takes all guess-work and worry out of finding, buying and building your investment properties.
As a property investor and developer you’ll buy land, finance property deals and build (or employ builders for) projects. You get to create, control and organise all processes of property investments and property development from beginning to end…
As a property investor professional you’ll work with many stakeholders including:
Real esate agents
Property managers and more…
Before we move forward, what do you feel is holding you back from reaching your financial goals? Are you unable to connect the dots between buying properties and managing your wealth?
Let’s start by answering some questions in context to putting a property investment business plan of action together, because most property investors are facing brand-new problems, which are holding them back from genuine wealth.
Management of your property business comes back to a process. In fact, if you’re at the very beginning of your journey, you have the advantage…
Why is now the time to understand the crucial importance of creating and implementing systems, which helps you take 1 step back and 3 steps forward? Because you want to leverage the ownership of your business instead of being slave to your property portfolio.
This is especially true in your property investment business:
NO extra stress
Property investments for sustainable, financial independence and long term security. Ultimately its the reason why most of us are property investors, right?
You don’t want to go into the property business to replace your existing job with another full time job as employee working 60 hours a week in your business because that’s what you’re passionate about.
You’re doing property as a business because you want to enjoy more of the lifestyle
that property investments can provide you. It is a means to an end.
What if you take a ‘wait and see’ attitude with property investing? Ideally, you’d know your plan of action in context to your own financial status, whether you’re buying property, developing, renovating a property or borrowing more money to put towards a deposit.
Everything you do in your property business should be documented. The name of the game is to management, right? You want to systemise your property business and every process you do is documented.
Here’s the reason why? Because it means you could take a 4 week holiday (insert exotic location) and just about anyone could run your property business with simple instructions while you relax and enjoy the sunshine…
Of course, if all of the information and processes remained locked in your head, what would happen if you decided you wanted to take a break and enjoy a 2 week holiday?
Well, it would mean your business would be on hold for 2 weeks. You obviously don’t want to feel guilty or emotionally attached every time you want to take a well deserved break.
That’s why a property business structure which is completely and utterly dependent on you is like a ball and chain. The point is you want to break free by positioning yourself
so your property business works without you being there.
The other massive reason why you want to systemise is your property business is because it becomes far more attraction in terms of being saleable, viable and more valuable asset.
Here are some highly effective ways to ideally model your own property portfolio and lifestyle, so it doesn’t become another full time job.
As a property investor you want to get to a point where you work minimal hours, so this is where you plan and structure a complete hands-free or fully leveraged system:
What amount of income-producing assets do you want in order to create the cash flow and income you want when you decide to “retire”?
An property income-producing asset is structured to generate money for you via:
Rent (buy and hold)
It’s not your home you live because you won’t get income. To figure out what you need here’s an easy calculation to use; income you want (per year) x 20 = assets you need to own which produce income or cash flow
20 is used because 20 divides into 100 five times, which means it’s equivalent to a 5% yield, income or interest. This is only a guideline to give you an idea of what you want to aim for.
Take a look at the example below if you want a $50,000 income per year:
$50,000 – $1,000,000 income producing assets
$100,000 – $2,000,000 income producing assets
$25,000 – $500,000 income producing assets
You want to start documenting all processes (steps and tasks) from day one and expand as an ongoing process, starting small, keeping it simple, fine tuning and optimising later…
That way in say 3 to 5 years, as you’ve accumulated 10 or 20 properties in your portfolio, your life is so much easier and you’ll free to focus on other passions and be glad you did it.
The upside is you’ll find you’re able to make much more cash doing it this way, even whilst sunbathing on the beach. It probably sounds like a fantasy, however the basic steps are divided into 3 areas:
Every successful property investor we know goes through this transition. It’s often painful because we all have a fear of letting go and trying to handover work you’ve always done,
and not being happy at the results others produce, (maybe you can relate to this)…
Most of the emotional energy is spent feeling frustrating in between two places. It’s a no man’s land and ultimately you end up taking the work back yourself, because no one can do it as well as you.
In fact, this is a massive and costly mistake, its a bottleneck to slowing down your wealth creation strategy.
Have you ever wondered why Bill Gates or Rupert Murdoch can make multi-billions? Do they have more hours in a day than you?
They have grown to the point where they employ 50,000 employees, and they are getting up to 50,000 times more bang for the buck, more work rate per hour than most people.
If these multi-billionaires reluctantly tried to do it all bursting at the seams (before hiring or outsourcing) they’d be struggling doing everything and would still be a one man band overworked and underpaid.
Before you’re even ready to begin agonising, I’d suggest you start organising. You want to leverage every skill and resource available to you.
This is what leverage is all about. In other words, tapping into other people, money, skills and experience. Anything you can do to achieve more with less makes you richer.
You want to plan ahead. This isn’t about convincing as the concept is very tough to grasp; because it’s not your fault if you’re working harder…you don’t understand the right plan…
Look, if you want to take your property business to a high level of success, you want to understand how to play a much smarter game.
This is where you begin to outsource whatever you can pay for to save yourself time. This is a smarter and better model, because focusing on saving a few bucks here and there is playing a small game (fastest way to get poor.)
Your property investment mentor can be a huge source of support and leverage, saving you $10,000’s to $100,000’s in costly mistakes and a steep learning curve.
Typically you’re saving yourself 1,000’s of hours in wasted time trying to learn from scratch or re-inventing the wheel. If it feels painful, you know and understand why you want to do it now, so pay close attention to resistance.
The concept of outsourcing more, sooner rather than later becomes ego embedded as you see your wealth accumulate faster.
Why not get used other people doing projects and tasks for you? Why play small trying to manage properties yourself? The emotional and wealth creation opportunity cost is huge.
These days its so easy to get someone doing all your administration, pay for cleaning, dry cleaning, meals out, drivers; anything which you can free up head space for thinking and buy back time to utilize to make more money…faster.
The richer you get, the more money you’ll invest into buying back and freeing up your time. You might feel the urge to kick and scream. So far, so good!
As a property investor you’ll want to leverage systems to grow your property portfolio and make more money, right?
Its inevitable at some point…you’ll hit a wall because of various internal and external factors “the wall” is totally unavoidable if you want to be rich. You’ll hit it whether you like it or not.
Often you’ll smack face first into it, and sometimes you’ll run full force to completely crash into it. Other times you need to climb over it.
No matter how high, sometimes it takes years thinking about how much it hurts when you last had to confront the wall. This wall is both psychological and physical (two sides).
On one side of the wall is a life of quiet desperation, living to demands of others and without choice or control, no sense of freedom, meaning or personal achievement.
The other side of the wall is the greener pastures you want to graze on (freedom, choice, money, and enjoying rewards). This wall is leverage.
It’s your ability to get more done in less time by leveraging other people’s time and skills in more ways and places. Its you replicating better yourself, you’re bigger, stronger, better, faster, more effective…
Perhaps as you’re reviewing your successes and failures, over time you’ll clearly be able to take a good look back with gratitude at what you’ve created in your life by understanding the rules of leverage and getting over the wall of fear, doom or desperation.
If you laser focused on your goals and mixed a few elements of passion for good measure, do you feel it would be well worth the effort:
Leverage and outsource
Leverage projects not tasks
Delegate and manage
Define projects and roles
Every property portfolio starts with small, steady calculated risks. You can always reverse your decision because you can’t buy time back, right?
Most people just hand out tasks, you want to leverage entire projects and create ownership, passion and importance from the outsourcee
Keep it simple with clear communication. Clear and concise instructions, provide all the info and resources required. Always get confirmed feedback, never assume
If you allow people to define projects and roles because of selfish motivation, if someone feels they’ve created a plan, project or task, they own and deliver better results.
The psychological wall is often imaginary, its the barrier between your and your mind pretending too be busy. You only fool yourself if you don’t leverage:
Get constant feedback
Hold team accountable
Lead by example
Hire on attitude or experience
Use what you’ve learned
Manage strategically not emotionally
Keep team fresh
Give clear instructions then allow them to get on with it because professionals do it better. When mistakes are made, correct immediately or errors continue to happen.
Give constant feedback and praise good work publicly, don’t point out improvements
Whatever your style, you want to be consistent because inconsistency creates fear.
Consistent in your behaviour, every now and again, surprise, shake it up a little to stop going stale so be there to help people get through their own glass ceilings.
Set the highest standard. If you expect the best results you’ll attract the best. If they can’t live up to your high standards, one day they’ll thank you for being demanding.
Actions speaks much louder than words so you’ll show, inspire and lead by example.
Water and oil don’t mix. If you hire experienced staff you’ll get to learn from them, but if you hire on attitude, you’ll get results based on how good you train them
How you feel doesn’t enter into the equation. Reactive management leads to poor decisions, regret and a lack of control. Praise even when you don’t feel like it
Get rid of bad apples quickly because if they’re not producing results, giving people too many chances costs you more money. Be fair and consistent and only retain key contributors in your team.
Want to get the strategic skills and deeper knowledge you’ll need to excel in property investments:
Develop sophisticated approach to property investment, market research and analysis
Take decisive action with confidence on your increasingly complex theoretical knowledge
Learn specialist technical skills in property investment and decision making
Benefit by learning alongside experienced property investment mentor with diverse property projects
Safe as houses an expression to satisfy a doubting person…
Oh…it’s as safe as houses, i.e., perfectly safe, apparently a figure of speech used in property as an investment.
Safe as houses phrase originated when the railway bubble began to burst, and people began to turn their attention to more reliable or stable forms of speculation, which was slow and steady…
Safe as houses, let’s firstly establish your investing strategy, criteria and action plan:
How much money can you borrow to invest
How much time required for research/due diligence
How much money can you afford to lose
How much debt can you manage
What type of property deals
How far from CBD
What’s the maximum interest rates for borrowing
Residential real estate is almost the sacred cow of Australian investment. What if your sights are set on building a real estate empire, does it mean embracing risk with open arms?
Whatever real estate strategy you decide to do, just bear in mind networking is even more important in real estate than in other industries…so start pounding the pavement as soon as possible selecting the all-important team to manage your projects.
Risk, reward and reality. It’s easiest to think of property investments from least risky to most risky and analyze the pros and cons in each category:
(a) Least risky investing means acquiring and operating existing properties/buildings (buy and hold strategy)
Property investing is all about stability and getting high single-digit returns by operating existing assets (least risk when a building is already operational and generating rental income)
(b) More risky or value-add using opportunistic strategies for improving existing properties.
This is where investors aim to make substantial improvements and renovations to existing properties instead of acquiring and operating, (returns from 15–20% range, may go higher depending on how risky the strategy)
(c) Most risky which is real estate development and building completely new properties. Most risk equals highest returns?
You might think real estate development offers the highest returns because it’s also the riskiest, right?
Real estate development involves buy, sell, develop, managing properties, third party joint ventures (stakeholders) and of course all professionals including:
Real estate agents
The real money in real estate development primarily goes to investors, which put their money at risk in the developments. To complete the construction of a new property, developers only put down a very small portion of total equity, perhaps 5% or less.
Many times the developer contributes land as the only form of equity in the project using debt and mezzanine financing to fund the entire construction cost.
You weigh up the risk versus reward before deciding. It is generally accepted the higher the reward the greater the risk. Property development slightly increases risk because of the many variables such as:
(a) Site costs
(b) Development costs
(c) council approvals and contribution costs
(d) Construction costs
(e) Resale values
Safe as houses…a thorough working knowledge of all these areas is required in order to succeed. Most of the returns go to the third party investors which come up with the rest of the funds.
How does no cash flow from properties sound like because buildings are under development, so there’s no cash flow generated until tenants move in and rental income starts flowing.
The fees property developers charge are not great compared to the amount of overheads, sometimes there isn’t much money left to pay salaries to employees.
That’s the reason why you wouldn’t get into real estate development if money is your main goal, only do it because you’re interested in building and construction side of real estate and you’ve cash resources with small surplus to cover contingencies and enough money to invest in development projects yourself.
What if you just love every aspect of real estate? People which find the greatest success in real estate focus on the end goal of owning income properties. There are actually real estate investors from all walks of life…
Investing in real estate yourself…you don’t need to raise hundreds of millions of dollars just to buy a house. The key is to find your core strengths where you can be initially be successful, so you’re able to generate enough cash flow to own properties yourself.
So let’s take a wild stab at your future goal here…you want to make a lot of money and ideally own three or more properties debt free and outright (perhaps multiple skyscrapers with your name on them one day, might even end up with your own island one day:)
You’d also like to avoid working in a job if at all possible, and perhaps you want to make the transition from investor to developer?
As an added bonus, you don’t want to earn badges from a top notch school of hard knocks to get started, right? You’re thinking its all worth learning how to crunch the numbers, and sounds like real estate investing is a good fit for you…
How to analyze real estate deals, making sure the numbers work?
Each property is unique and brings a different value to potential investors, so it’s trickier than it sounds to find the right property.
Investors generally look at three factors when analyzing a property:
(1) Investors look at what the property/building is currently doing, how much income it has been generating and what the property-level expenses are, which gives you the net operating income (NOI).
(2) Investors look at the property to make sure it can maintain its current income.
It’s one thing to have generated strong income in the past, sometimes factors like:
(b) Demographic shifts
(c) Changes to the local area can drive a property right into the ground…
(3) Investors project what the building could do in the future to increase income and/or cut expenses.
Depending on what kind of deal it is, investors will focus on either the current income or the projected income.
For example, a stabilized deal which isn’t expected to see much upside or current rents which is the key valuation driver.
There are four main real estate deal types:
(1) Stabilized deals (buy and hold) are “blue-chip stocks” of real estate investing. These properties are generally recently built and currently have a stabilized high yield, e.g. 7% or 8% per year.
When investors look at these properties/buildings, they’re generally maintaining income which is currently produced. There isn’t a lot of risk with a buy and hold (stabilized deal) and also not much reward.
(2) Renovation is the next type. A property which is a good candidate for a renovation would fit the description of an older building in a stable growth sub-market (one which can support higher rent prices) could get significantly higher income or value from renovating houses, units or entire building.
There is more risk involved with renovation type deals than a buy and hold stabilized deal, because property investors are banking on future upside of renovating the property (perhaps reselling to homeowner or another investor).
Value-add deals do limit risks? Typically the property/building is in decent condition and is a tangible asset ( i.e, asset = liability + stockholders equity) which is easier to show, discuss and understand.
An asset is a resource which is expected to provide future economic benefits (i.e. generate future cash inflows or reduce future cash outflows)…an asset is recognized when:
(a) Asset is acquired in a past transaction or exchange
(b) Value of asset’s future benefits can be measured with a reasonable degree of precision
In markets where there is increasing momentum and upside, value-add deals are easier to do because it requires vision and creativity, which is fun. Downside of increased momentum is competition from other bidders dramatically increases pricing for certain assets.
However, added value is created by gaps in information and understanding. This is where real deals can be made by being innovative,
creative and diligent with the details.
Success comes from properties which others may have overlooked or passed due to their lack of motivation and understanding.
Nothing in real estate is easy, yet if you have the desire to roll up your sleeves and get a little dirty, there are diamonds in the dirt.
Real estate is challenging and rewarding and you just got to know how to dig for the value-added, diamond in the rough deals.
(3) Real estate distressed properties, these usually need a lot of work (units or building itself is in bad shape) or under performing.
Often, these building have huge vacancy rates, so the projected income is a big factor in valuation. Real estate distressed properties carry even more risk than a renovation deal because the building needs work and it is already under performing.
4) New development deals. These are just what they sound like. Development happens when an investor wants to take raw land, then evaluates what can be built on it and what kind of future returns can be generated.
Development deals have the highest risk, and also carry the highest return. In reality, you don’t necessarily make the most money with development deals, because of inherent risks and uncertainty, don’t assume highest risk equals highest profits in your bank account.
Property valuation and due diligence: You are primarily wanting cash flow and reliable cash-on-cash returns because in real estate, property itself produces the income for your return on investment.
While the numbers are generally used to support valuation, comparable sale analysis is king when valuing properties because property is only worth what someone is willing to pay for it.
In residential “yield” is often used instead of “cap rate”. Capitalization rates are used as the primary metric in property valuation.
Cap rates are a very simple way of calculating the return on a building. Essentially, capitalization rates tell you what percentage of the funds you paid for the building comes back to you annually.
It’s just an easy metric to use; for example, if you have a 6% cap rate property and it’s at a 6% debt interest rate, you can easily see it is neutral leverage and isn’t returning any money.
Cap rates do have flaws and the biggest is everyone assumes cap rates in a specific sub-market to apply to every property within that sub-market. Simply this assumption isn’t true.
Every single property has its own nuances which makes it more or less appealing to potential investors.
If you get too clinical on only measuring cap rates, you could either be overvaluing or undervaluing your building. You really need to analyze each property/building and the market thoroughly to get a sense of how much value it is truly worth.
Another weakness, while cap rates are great to use in a city like Melbourne where buildings are constantly being bought and sold,
there’s considerably less data in other regions without as many sales taking place, so the numbers may not be reliable.
Basically due diligence means you are making sure the deal stacks up and doesn’t have more holes than a slice of swiss cheese.
Sellers want to sell their property at the highest price and investors have an interest in closing the deal.
Safe as houses, buyers need to protect themselves; due diligence is generally broken down into two components:
(1) You analyze the property at a micro level and then in the macro.
In the micro, you look at the building itself. You check the market to make sure projected rent prices at the property/building actually make sense, and people are paying those prices at similar properties in the area.
Next, you look at macro trends. You then dig deeper to make sure the tenants are in good financial shape. This is especially true if you are buying a single tenant building or more tenants in general.
You look at what other investors are paying for comparable buildings to make sure you aren’t over-paying. It’s also important to look at macroeconomic trends in the region you are investing to make sure the submarket can sustain positive economic growth over time.
Safe as Houses
Australian property investors guide to property investments now, where to buy investment property, positive cash flow property using proven strategies to create wealth and financial freedom