Are Start-Up Investors Better Off Now or 17 Years Ago?
No matter what year it is, growing a property investor portfolio begins and ends with hard work, long-term commitment and a healthy dose of guts and determination.
Many of Cohen Handler’s clients are repeat investors, buying their second, third or 11th property from us to add to their portfolios. You might be surprised to know that a fair proportion of these investors did not begin their investment journey particularly wealthy and are on modest salaries of around $55,000. With good management, that’s enough to handle repayments on a property starting at around $350,000.
They have achieved what they have by starting early with reasonable expectations and moved forward without hesitation to take advantage of the next opportunity available to them.
Those who first started with us in 2009 now have extensive portfolios and a passive income of $100,000. By utilising the skill and experience of a buyer’s agent as soon as they were ready to invest, they have paved their own way to success, and along the way inspired their friends and family to do the same thing.
While today’s market is different to what it was in the early 2000s, there are still many opportunities for young start-ups to get on the investment bandwagon. However, due to the altered market, you cannot take the same approach that worked 10 years ago. You need to buy smarter and better, and most importantly ‘think fresh’.
Property Investment Now and Then
- You don’t have to work harder
Unfortunately some things never change. You still have to save, work hard and break a sweat to buy a property. Don’t be frightened off by economic movements. They are outside your control. Most significantly, time is on your side – the number of working years you have left in you is a major positive, and in the long-run will allow you to work smart and buy smart.
- Interest rates were higher
In 2004, lower prices on the surface made it seem like a ‘buyer’s paradise’. However interest rates were very high so the cost of purchasing a property was still sizeable. The rent was low and did not equate repayments even on an interest only loan. Cash flow would be a significant factor for many Australians and therefore emphasis on capital growth would have been sacrificed in part to ensure that the holding costs of the property could be met.
- The rental market was worse
In the noughties when property was cheap, there was also an oversupply problem. As a result vacancy rates escalated and it was not unusual to see a property sitting empty for months until a tenant was found. These days the rental climate is better, up to 200,000 people may attend a rental inspection in Sydney and the vacancy rates of properties are much lower and stable.
- Getting finance is more difficult
So your rent may be a sure thing these days and the interest rates are certainly favourable. However, now investors face a major challenge in securing finance. In the early years of this century, getting a loan was fairly straight forward and many people were eligible for a loan of 90-95 per cent, even 100per cent of the Loan Value Ratio (LVR) if need be. In 2015, the Australian Prudential Regulation Authority (APRA) introduced much stricter guidelines that require investors to have more than a 20 per cent deposit to avoid the costs of mortgage lending insurance. Banks are also being extremely conservative with their valuations, which means the risk of your exchange not meeting unconditional approval by the lender is a very real concern. On top of this the banks have made it more difficult to withdraw equity from property to borrow further.
Another pain point with banks is the fact that they may not recognize all types of income. Many lenders reduce the loan applicant’s income from sources such as rent and assess any existing debt at a higher interest rate than what is actually being paid. Money earned from overseas may also be overlooked. We are not saying it is easier or harder to invest these days, we are saying it’s hard all the time.
- Adapting to change is important
There isn’t a ‘one size fits all’ approach with property – everyone’s position is vastly different, which is why Cohen Handler offers a fully tailored approach around each client’s needs. An individual investor has their own unique set of goals, situation and challenges. One of the most important factors an investor can do is adapt to change. This means following the markets closely and diligently and creating a well-read strategy to ensure that you are actually achieving an end goal when buying a property. And repeating this process for all subsequent purchases.
- Lay a good foundation
One of the most important factors in starting an investment portfolio is to ensure your foundations are laid correctly. Make sure you have at least 3–5 properties in the lower range of $350,000–$500,000 so you are able to better manage your finances and the risk is divided. The next property should also be bite-sized and achievable.
- Location is still important
Cohen Handler encourages our investor clients to diversity their properties in regards to locations. Many have purchased in South East Queensland, where the entry level for many is very achievable and relative to inflation, resulting in properties that have performed very well. There are examples of clients who bought only last year and who are already sitting on $50, 0000 worth of equity for an entry level investment. This means they are now in a favourable position to consider their next purchase.
- Ditch the DIY (unless you’re an expert)
Many investors say that they would not have been so DIY and hands-on now as they were in the past. Renovations and ‘flipping’ are now very costly both in principal purchase and in terms of the trade and labour costs. It would be more cost effective to purchase land and build a house on it. One thing Cohen Handler Buyers Agents continue to do is invest more and invest sooner. Buyers Agents can ensure that investors buy under value and create a quality portfolio with the right balance of cash flow and capital growth for your needs.
- Opportunity cost is huge
As many older investors purchased in regional areas, which were hotspots for cash flow, these balanced out high interest rates at the time but some may choose to ‘out-grow’ these and then they are regarded as an ‘opportunity cost’. Many investors now sitting on passive income may choose to continue to reinvest back into capital growth as cash flow is less of an issue. Many negatively geared properties in investors’ portfolios will become positively geared in time. When buyers who are still in their 20s mention they would like to buy a property for their retirement, we view that as ‘quitter talk’. If you are serious about purchasing for your retirement you would be buying something that you have no intention of living in any time soon.
Top Tips for Start-Up Investors
- Get the right balance of cash flow and equity.
- Move with the times and grow with the market.
- Stay open minded. Every state in Australia has opportunities to grow as does every market.
- Always have a long-term strategy and stay committed.
- Understand what type of property will work for you at each stage of your portfolio
- Know how finance affects you and don’t be afraid of investing money.
- Surround yourself with people who know what they are talking about and who have your best interests in mind.
- Sitting on the side line is the greatest opportunity cost of all.
Cohen Handler’s team of expert buyers agents are specialists in finding the right property for you at the right price. If you are interested in purchasing an investment property and growing a property portfolio, contact us now.