Successful property investors understand how to analyse a deal, seize an opportunity or steer clear of bad risks. How do they do this in such a consistent and confident manner? Is there a property developers’ “bible” they each have in their back pocket? The answer lies in a simple set of ‘money rules’ developed to deliver their own particular objectives, be it to become a property millionaire or to live out a comfortable retirement. As an aspiring investor, individuals would do well to follow these five simple rules:
- Plan for a falling market – when buying a property plan on the property prices going down, not up. You should aim to purchase at least 10% below what you believe its value is at the time. If prices drop by 10% you are still ok.
- Pay off capital and interest – People using ‘interest only’ believe the prices of property will always go up. With principal (or capital) and interest loans, no matter what happens, the tenant ends up paying the mortgages off on the properties over time. This is how you know it is an investment – someone else is paying it off for you. With interest only loans, nobody is paying off the loans; you are relying solely on increases in property prices to get ahead.
- Gear comfortably – many investors will keep leveraging to 80% or higher on their overall debt. When they do get property price rises, they will increase their borrowings back up to around the limit of 80%. Unfortunately, if there was ever a market correction of 10 – 20% anytime in the next 20 – 30 years, this could potentially wipe them out financially. The banks would view them as high risk and too exposed financially and could possibly call in all loans, therefore forcing investors to sell at even more reduced prices. It is far more difficult to sell property quickly in a falling market, as many investors are also trying to do the same. Consider gearing at around 70% to build in more flexibility and safeguards.
- Set and review rules – stay nimble – Set 3 to 4 rules that you will stick to but which you will revise every quarter. These could be which countries to invest in (stable regimes for instance), which type of property as well as the return you need. Don’t always assume an appreciating market but also build up rules for a static or declining market. There are many opportunities for property investors in a declining market.
- Believe in your success – Be professional about your investing and treat it as a business. 95% of your success will come down to your internal beliefs and your internal psychology.
If you are just beginning to invest in real estate, think carefully. Are you doing it simply because it seems like the popular thing to do and all your friends are doing it? Take a long term approach, get good advice, use a mentor if necessary and keep developing your own mindset and psychology. You can do well in any market in real estate – if you know what you are doing. Whether prices are steady, going up, or declining, you can always do well with the correct approach. And remember, the declining market opportunity outweighs the steady or rising market, and is when professional investors stand to make the most money.