Too much information?

As a property investor I like to keep up to date with what is going on in the property market, but I find the amount of available information increasingly confusing as everyone has an opinion on everything. I find myself constantly bombarded with ‘updates’ from multiple media sources, e-newsletters and social sites.


When I get overloaded with conflicting advice I always go back to basics: what is my overriding strategy and what are my risk management techniques?


OVERRIDING STRATEGY

We are in the business of creating wealth for ourselves in the safest possible manner. So capital gain is paramount and ongoing cash flow (or holding costs) must be comfortably manageable.


As with every investment there is an element of risk. The good news is that, historically, property has proved to be a pretty forgiving investment. Volatility has been low and, with some cyclic exceptions, such as the current correction, year on year average price growth has been positive for the last 50 years.


So, if we stick to some basic rules, we mitigate this risk pretty efficiently. I stick to sound location fundamentals, such as:


  • Commutable distance to a capital city CBD.
  • Eastern seaboard locations. Perth is too volatile for my liking and Adelaide is too small.
  • Avoid one horse towns; make sure the local economy is multi-faceted. For example, Geelong in Victoria is commutable to Melbourne but also has its own strong diversified economy.

CASH FLOW MANAGEMENT

When purchasing a property, I look for properties where the weekly rent is between 4.2% and 5% yield. This helps to ensure that, everything else being equal (average council rates, buy new to maximise depreciation, amongst other factors), my holding costs are going to be reasonable.


In more expensive markets such as Sydney blue-chip suburbs, yields are usually lower, so cash flow planning is more important.


Of course, the next step is to do a full cash flow projection, but the above rule helps me spot straight away if a property will fit in my strategy. I always run my projections at current interest rates, but also at 7%, to see if I can still cope with cash flow when they eventually do increase.


PROPERTY CYCLES

Property moves in cycles and it is clear that we are currently in a correction phase in markets such as central Sydney or Melbourne. Outer suburbs are still holding in most places.


There are pros and cons in every part of the cycle. In a buoyant market I ride the capital growth wave. Rental yields tend to be weaker. In a flat or slightly declining market there are bargains to be had.


In an outright crisis, governments and/or the Reserve Bank usually come to the rescue. During the GFC my entire portfolio of properties was cash flow positive because interest rates went down to a 30-year low. Even in a crisis people need to live somewhere so I had no trouble finding tenants as my properties are all in good locations.


UNDERSTANDING THE NUMBERS

Once I understand the numbers on a particular property I can then make a decision whether to go ahead or not. Key numbers to consider are:


  • How much loan/debt can I service?
  • How much deposit do I need?
  • Once I have acquired a property, what will my ongoing cash flow be (negative, positive, how much)? What happens if interest rates go up to 7%?
  • What is the likely capital gain?
  • How do I plan to realise my gains and what is my timeframe?

CONCLUSION

Overall, property is a pretty attractive investment vehicle with low volatility, comforting historical success and excellent fundamentals. Just add a strategy framework and a risk mitigation policy and property becomes a solid tool for creating wealth.


Even if the current media beat-up gives you the impression that now is not a good time to invest, there are fundamentally booming markets in Australia. Remember, we don’t have one real estate market, we have many thousands!