Becoming a savvy investor isn’t something that happens overnight. While some people possess more aptitude than others, any successful investor will have benefited from years of experience, mentoring and access to the knowledge of others.
But that’s not to say there aren’t ways to effectively harness such knowledge and distil it into an accessible form. With more than 15 years of experience in property investment across multiple strategies ranging from capital growth and positive cash flow, through to small- and largescale property development, Simon Buckingham, director of Results Mentoring, has developed a variety of tools to aid new and existing investors alike.
“We train people to become well-educated and sophisticated real estate investors who sensibly use property as part of their investment portfolio,” says Buckingham.
He explains that there are five key steps that should guide any investor who is looking to expand their portfolio: creating your strategy, unlocking finance, finding the right property, negotiating amazing property deals, and establishing effective management.
“Whether you’re brand new to investing or have already built a portfolio, they’re valuable ways to look at your current situation and reassess your strategy if necessary,” says Buckingham.
1.Creating your strategy When it comes to investing, the first – and most important – question to ask is simply, “Why do I want to do this?”
It’s a question many investors don’t seem to ask themselves until they’re well into the purchasing process, Buckingham says.
“When you ask people why they’re investing, many will respond with a vague answer like ‘to make money’ or ‘to have a property portfolio for retirement’,” he says.
The problem with answers like this is that ‘having money’ and ‘owning properties’ aren’t really goals per se.
They’re a means to an end but not an end in themselves.
“Investors without clear goals tend to approach their investing without a plan,” Buckingham says. “As a result, they often end up with portfolios that fail to meet their expectations and real financial needs.”
If your main objective is to create a recurring passive income, then income-producing deals such as positive cash flow properties could replace part of your salary.
Undertaking multiple similar deals might ultimately replace the entire income from your job over time. In this case, taking on long term negatively geared growth properties may be counterproductive.
Alternatively, if your main goal is simply to have a lump sum of cash to buy the material things you want in life, then taking on a number of high capital growth properties or value adding projects may be better suited to achieving this than positive cash flow investing.
To help narrow down the strategic choices available to you, Buckingham suggests taking a “path of least resistance” approach. With your overall goals in mind and an understanding of your current financial resources (available investing capital and borrowing capacity), consider what financial obstacles you are most likely to run into first. Are you more likely to exhaust your investing capital before you hit a borrowing limit, or vice versa?
If borrowing capacity is going to be the greater issue in the short term, then a strategy of investing in high-yielding positive cash flow property deals may boost your borrowing capacity and help you build your portfolio.
On the other hand, if limited investing capital is the greater constraint, then a strategy of actively adding value in order to rapidly add to your equity or capital base may make more sense than embedding all your existing capital into a positive cash flow property or longer-term growth investment at the outset.
You may even move back and forth between strategies over time, to help make your investing more sustainable.
2. Unlocking finance With your strategy in mind, the next step is to secure finance for your prospective property. However, as Buckingham notes, it’s crucial to be well prepared when seeking a loan. Over the last few years, APRA (the main financial regulator of the banks) has been putting pressure on lenders to improve their ‘responsible lending’ standards. In tandem with the recent royal commission into banking and financial services, this has led to banks scrutinising how much a person can borrow much more heavily, with many taking a conservative approach around discretionary expenses.
“Stick to a tight budget for at least three months before your next loan application,” says Buckingham. “Obviously you’ll have fixed expenses, but it’s crucial to look at ways to cut back on discretionary expenses.”
Fixed expenses include rent or homeownership costs (eg mortgage payments, rates, home and contents insurance, utilities), school fees, childcare, ongoing medical costs, health and life insurance, and a reasonable allowance for essentials like groceries, transport, phone and clothing.
Discretionary expenses would include things like online subscriptions, gym memberships, wellbeing therapies (like naturopath or chiropractor appointments), dining out, charitable donations, or anything else that is perceived as being ‘easy’ to cut back on.
Buckingham also suggests minimising consumer debt as much as possible. Credit cards are one particular area in which caution should be exercised.
“It’s not the outstanding balance but the limit which impacts your borrowing capacity,” says Buckingham. “You should consider reassessing your limits, or possibly even eliminating certain cards altogether.”
3. Finding the right property Finding the right property in the right area is intrinsically linked to your strategy. Being able to articulate a clear description of the type of property you’re looking for to real estate agents will immediately set you apart from other investors.