I purchased my first property in July 2007, a little over 15 years ago, in Marrickville in Sydney’s Inner West. Whilst it wasn’t (at the time) an investment property, it later became one. The following year I purchased my second, again in Marrickville, not far from the first. From then on I continued to invest, however ventured outside my own backyard to other areas around the country.
Along the way, I’ve learnt a lot. There’s a lot to consider when investing in property, and there are many potential pitfalls. When done properly, however, property investing has proven to be a reliable path for strong risk-adjusted returns, over the long term. In this article, I’ll outline the 15 biggest lessons I’ve learned over my 15 years of property investing.
1. Treat property investing as a business
Over the years I’ve worked with a lot of property investors. One common trait I see amongst the most successful investors is that they view property investing as a business. They set aside time to review their portfolio, and actively manage it as if it were a business.
Below are some of my tips to help:
- Regularly communicate with your property manager, to stay on top of maintenance requirements and ensure you’re up to date. I outline some tips on how to find a good property manager in this article
- Review your finances (ideally with a broker) at least every year, to make sure your finance structure is appropriate and your rates are competitive
- Check your property management statements to ensure they’re accurate. I once picked up an $820 error, where the property manager had charged the tenant for two weeks rent, but failed to pay me
- Value your time. If you’re considering renovating, and are looking to go down a DIY path, make sure you properly account for the value of your time. I often see people underestimate how long things take, and a lot of the time it’s better to engage a professional
2. Buy properties that appeal to owner occupiers, not just other investors
Owner occupiers are the dominant force in the Australian real estate market. According to the ABS, Australia wide, owner occupiers account for almost 70% of the property market. Of course, every market is different, with some being more investor focused, and some being more owner occupier focused.
I’ve always focused on suburbs where owner occupiers are in the majority. I’m not interested in places like mining towns, where the itinerant nature means there’s often not a baseline of owner occupier demand. Nor am I interested in property types that only suit a narrow market. This reasoning has led me avoid properties such as inner-city high rise apartments, which are specifically targeted to investors. These can often look appealing, with nominally higher yields, but the long-term performance of these type of properties is often underwhelming. In fact, given many of them lack a decent secondary market, these properties can really struggle when markets turn (such as the one we’re in now in Sydney).
Really understanding the types of properties and features that are favoured by long term residents and owner-occupiers can be a solid strategy for property investors. This includes obvious things like school zones, a property’s aspect, the street appeal and general attractiveness of the neighbourhood, amongst many others. In essence, this is a simple argument – it makes sense to find properties that appeal to more people, rather than fewer. And in my experience, the types of factors that make a property appealing to home buyers are also things that are well valued by tenants.
3. Understand the value of a good tenant
One of the most important things I’ve learned over the years, is the value of a good tenant. One trap that newer investors can get into is to look at the owner/tenant relationship as somewhat adversarial. They seek to increase rents as soon as possible, and often delay in acting on tenant requests for maintenance. This is particularly prevalent in a market such as the one we’re in now, where the balance of power has shifted toward the landlord.
I’ve had most success when I’ve found tenants who want to live in my properties for the long-term. They often fix little things around the property, and look after it as if it were their own. In turn, I make sure the property is well maintained, and I never delay in fixing things when they’re brought to my attention. I still review the rent regularly, and incrementally increase rents when that is justified by market conditions. However, I’m ok wth leaving a few dollars on the table if I’m happy with the tenant and I feel they’re looking to remain for the long term. If you find a tenant that treats your property well, you should look to keep that tenant. That doesn’t mean providing gold plated taps, or discounting the rent ridiculously, but it does mean treating them more as a partner, and less as a temporary occupant. To me, that’s sensible business.
4. Be careful of niche properties
Similar to my point about finding properties that appeal to owner occupiers, I’ve also seen (many times) investors fall over when they target niche properties. Things like student accomodation and holiday resort style units are often the biggest culprits. This isn’t to say that you can’t make money in these investments, but I’ve seen countless first hand examples of investors being burnt by investing in properties that have quite limited resale potential. A good way of setting up a filter to help weed out these style properties is to work with a good mortgage broker, and to ask them to check if a potential property would stack up according to the lender’s lending policies. Often they will have limitations on things like the size of an apartment. Obviously your due diligence should include a lot more than just this, but it’s often a good red flag. If you find it tricky to find lending for a property, chances are others will in the future. I wrote more about this topic in this article.
5. Don’t blindly chase yield
I’m not interested in re-opening the cashflow vs capital growth debate (I’ve written about that here), but what I will say is that it can be a dangerous starting point to adopt a focus just on higher yielding properties and then working backwards from there. These properties are often high yield for a reason. Having a decent yield is important, and it’s obviously a critical part of the equation. However, it’s not the first thing I look at. I’m more interested in finding capital growth drivers and rental growth drivers. Yield is an important consideration, and it’s something I consider carefully, but I don’t start with a pre-requisite yield number and look to filter on locations based on that number.
I’ve written more about understanding yield, and avoiding the potential high yield trap, here.
6. There is no single Australia property market
7. Run your own race
One of my favourite expressions is “Comparison is the thief of joy”. I feel this is particularly relevant for property investors. If you spend any time online researching property investment, you’ll start seeing lots of ‘examples’ of investors who claim to have retired early, with untold riches from property investing (yet, still feel the need to run an agency or sell a course!). My advice….ignore it all. Understand that a lot is just marketing. I know loads of very successful property investors, and none of them feel the need to jump online and continually remind everyone how fabulously rich they are.
Focus on your goals, set a plan to get there, and ignore the noise. Run your own race.
8. Houses vs units…it’s more nuanced than many assume
I’ve had a lot of success over the years investing in units in blue chip areas. They’re not fancy, they’re not flash, but they all have one thing in common – they’re in tightly held areas that are always popular with owner-occupiers and tenants alike. I focus on finding older style (typically walk-up red and blonde brick buildings) in areas close to transport, with lots of entertainment options, and that attract tenants on relatively strong incomes. I target properties and buildings that are typically lower maintenance, but often with some value add options. I avoid medium and high density apartments that are typically marketed at investors. This strategy has been very successful for me. It’s simple, but not easy.
Many investors, commentators and investment gurus will tell all and sundry that you can’t make money by investing in units. I’ve proved you can, but only if you are very focused and have a sensible investment strategy. One key criteria that I look at is to try and understand the inherent land value of a property, whether it’s a unit or a freestanding house. I find that there are opportunities in all sorts of markets, and sometimes units in small boutique blocks can present solid investment options. For many investors, especially those looking for blue chip assets, they’re something that warrant consideration. The current Sydney market has many good opportunities for property investors, if you know what to look for and you’re willing to put in the work.
9. Price vs value
As they say “Price is what you pay, value is what you get”. Nowhere is this more important that with real estate. I often see people, normally on online forums and Facebook groups, looking to find the absolute cheapest areas and cheapest properties. This, for many reasons, can be fool’s gold. I started my journey in much the same way, all the way back in the mid 2000’s when I started researching areas to purchase. I was keen to minimise the amount I was spending to ‘get on the property ladder’. After much consideration and research, I ended up purchasing a modest one bedroom unit in Sydney’s Inner West, which I still own. I ended up not looking to buy the cheapest property, but rather I focused on affordability. The area was affordable for many, close to the city, with excellent transport links and developing as a lifestyle precinct. Over the years, it has performed substantially better than the numerous cheaper areas I was considering. I put the difference down to scarcity. Even though the property was quite cheap, by today’s standards, it has performed well as the supply in the area has always been quite low relatively to the demand for the property.
It’s easy to be allured by cheap, but remember that properties are often cheap for a reason. I analyse investment properties in terms of what sort of value they represent, at that particular price point. There are good investment options available at a range of different price points. It’s more important to focus on the actual underlying asset, and not just the sticker price.
10. Build a team
Property investing is a team sport. Even the best, and most experienced investors ensure they surround themselves with an A-grade team.
To be a successful property investor, you should consider building a team that includes the below:
- A mortgage broker
- A solicitor/conveyancer
- A building inspector/strata inspector
- A property manager for each property
- A buyer’s agent (potentially)
- An insurance broker (potentially)
- Others as required (eg a town planner, builder etc)
I’ve written more on this topic here.
11. Beware of confirmation bias
Have you ever been on holidays and happened to chance upon a local real estate agency and decided to start researching the area? Have you heard a hot tip from a Facebook group, and then looked online to see if it’s any good? Be careful, you’re now very susceptible to confirmation bias. In property investing it’s a common phenomenon, and many fall for it without realising.
Rather than chancing upon a potential property or area, and then seeking to justify the investment potential via research, I find it’s better to start by analysing the fundamentals of a potential area, based on your property strategy. There’s a lot of data out there (some free, some paid) that can help people analyse potential areas and opportunities. Once you’ve found some areas, then it’s time to get on the ground…not the other way around. Which brings me on to my next point…
12. Become a local market expert
There’s a school of thought out there that you don’t need to visit an area in order to invest there. Some will even argue you don’t need to inspect a property, and can just rely on a friendly property manager to do a free inspection for you (beware the potential conflict of interest here!). Unless using a buyer’s agent or trusted advisor, I’d be hesitant to invest hundred’s of thousand’s of dollars in an area if I hadn’t spent a decent amount of time in the area, really getting to know the local property market.
So, how do you become a local market expert? To me, that means knowing the good streets from the bad, understanding the sorts of properties that are in demand, and really understanding what’s selling for what. It also means building strong relationships with local agents, so you get access to good properties as early as possible. Becoming an expert is entirely possible with diligence and the right knowledge and skills. However, it’s takes a lot more than just jumping on your favourite real estate portal and setting up a property alert.
13. Be careful who you take advice from
Property is basically a national pastime in Australia. The amount of newsprint that is devoted to property is staggering. In my experience, pretty much everyone considers themselves a bit of a property expert. Mention to someone at a BBQ that you’re looking for a property, and you’re likely to be inundated on what to buy, where to buy, and how much to pay. My advice….be careful who you take advice from. By all means, listen to well intentioned friends and associates, but don’t rely on them for your research and due diligence. Be careful of the enthusiastic amateur.
There are plenty of professional advisors out there that can help you purchase a property if you need help and direction. If you’re looking to do it yourself, there’s a plethora of resources online that can help you learn what you need to. But, in this arena, you also need to take care. Beware the get rich quick gurus, who seem to be increasingly prevalent in lots of online forums, facebook groups and podcasts.
There are many reputable property podcasts out there, including The Elephant in the room, The Property Couch, Investing Insights, and the Property Planner, Buyer and Professor. If you choose to go down the DIY route, become a student of the game, and make sure you read widely. Never rely on just one source.
14. Have a plan
Investing in property is a long-term game. There will inevitably be times when the property market is going well, and times when things aren’t so rosy. And, as much as many people want to portray property investment as a passive asset class – it’s simply not. Even if you outsource important aspects (which I do) to professionals such as mortgage brokers, insurance brokers, accountants and property managers, it’s not an asset class where you can just sit back and do nothing. As such, there will likely be times when you get quite frustrated, and wonder if it’s worth it. That’s where having a plan is important. If you know what you’re aiming to achieve, and have a plan to get there, then the little ups and downs along the way become a lot more manageable. Every property that you purchase for your portfolio should be strategic, and should get you closer to your goal. Buying for the sake of buying just doesn’t make sense to me.
As always, if you’re looking to get assistance with the creation of a property plan, make sure you use an experienced and licensed professional.
15. Know how to manage risk
Like any form of investment, investing in property has inherent risk. This is something that I feel a lot have forgotten about over the last couple of years. Some of the ways that I like to address risk management in my own portfolio are:
- Always having sufficient buffers in place
- Purchasing properties that aren’t likely to require major ongoing operating costs (unless it’s a renovation project)
- Finding properties that have a strong yield, with expected increases in tenant demand into the future
- Ensuring the property is the sort of property that banks like to fund
- Finding properties that appeal to owner-occupiers and not just investors (see point 2), to ensure there is a ready market of potential buyers if I ever need to sell quickly
- Making sure the area/suburb I buy in has all the fundamentals for strong capital growth (in a general sense, I’m looking for economic vibrancy, infrastructure that supports jobs, excellent transport links, good leisure options, and a strong sense of community, among many others)
So, there’s my top 15. There are lots of other things I’ve learned along the way, but I feel this is a good summary. I’m in the market everyday, and I continue to learn. I read a lot, I speak to others actively in the market, and I’ve got some good mentors. To me, it’s part science/part craft. And I continue to learn everyday, so I can continue to be better at my chosen craft.
Please note: the above information and analysis does not constitute financial advice or property advice in any way, and it should not be relied upon. It’s important that you seek guidance from licensed professionals, who can provide advice based on your individual needs. No investment decision or activity or property purchasing decision should be undertaken on the basis of this information without first seeking qualified and professional advice.
