The real estate investing strategy I’d recommend to newbies
5 min read
There is no doubt that first-time property investors are staking their claim on markets across the nation.
In fact, many are choosing to rentvest and buy their first investment before they buy a home.
The thing is, while there is more information available than ever before, far too many newbies continue to make simple mistakes, which can cost them dearly in the long run.
So, here are three insights first-time property buyers must understand before wading into the market.
1. Educate yourself
From blogs like this one to property podcasts and YouTube videos, there is a plethora of real estate investing information at your fingertips – the problem is not all of it is good.
Can you tell the difference?
Unfortunately, many first-timers can’t, so they wind up listening to a “supposed” expert who is really just trying to market inferior properties to them.
Before blinding following the advice of someone who might have a sparkly profile online, do some research on how long they have been in business – including how many market cycles.
You must also know whether they adopt the strategy they are recommending to you because if they don’t there is something fishy going on.
The bottom line is you must be careful who you listen to.
2. Understand different types of investment strategies
Once upon a time not that long ago most people just bought one property, or maybe two, and then did nothing else.
Some of them might have achieved strong capital growth but that was probably just down to luck.
Others might have been stuck with a property that didn’t go up in value in a decade – or even fell dramatically like in mining locations.
There are a number of different investment strategies to consider:
- Capital growth – which means buying a well-located property that is likely to outperform the averages over time because of strong demand from owner occupiers.
- Cash flow – which means buying a property that attracts a high weekly rent that will cover more of the costs such as the mortgage repayments and council rates.
- Renovation – which means buying a property that needs some TLC so that you can on-sell it for a healthy profit.
Now I have deliberately written each strategy to make them all sound equally attractive – but they’re not.
You see, cash flow might sound like easy money, but those properties generally never increase in value significantly because they’re new or located in regional areas, so you are likely to lose out on stellar capital growth that is required to get the deposit for your next property and the next one.
Ditto, renovating, and flipping – this strategy doesn’t really work today because there are high entry and exit costs that will make a big dent in any potential profit.
Plus, most first-time renovators overcapitalise.
3. Invest for capital growth
And that brings me to the strategy that I always recommend to newbies – which is investing for capital growth and not cash flow.
Don’t get me wrong, cash flow is important because it pays the mortgage and keeps you in the game, but capital growth gets you out of the rat race.
Investing for cash flow sounds tempting, but you’ll never build a big enough asset base to have choices and develop financial freedom.
Also, renovation is a sound strategy, but not if you intend to flip it.
The better approach is to undertake some cosmetic renovations on a capital growth property that will improve its value over the long term as well as its rental income because tenants will pay more to live in a nicer property.
At the end of the day…
Investing in capital growth properties is one thing, but the other part of the equation is holding them for the long term.
That’s because it takes a number of years for the magic of compounding to do its work.
So, newbies must also learn patience as well as the ability to ignore any short-term vagaries of the market.
That way, in the years ahead, they will likely be in a better financial position than they ever thought was possible when they started.
