Having spent the earlier part of my career in the corporate world, I’m well versed with ideas around processes, KPI’s, metrics, dashboards and everything else that is common place within the boardrooms of corporate Australia. I’m now happily escaped from this world, however I have taken some of the things I learned along the way and have applied them to my other career, property investing. You see, property investing can be approached from a number of different angles. Some look at it simply as a to-do item that needs to be ticked off, some apply a bit more rigour to it and semi-regularly review their portfolio, and others, like me, treat investing in real estate as if it were a business.
In this article I’ll outline the four main areas that I think are the most important ones to address to help you shift your mindset and be more business like in dealing with your property(s). I should say, however, that the aim of this shift is not to give you more work to do, rather it’s to add a few (sensible) processes to the mix that will allow you to stay on top of your portfolio and help make sure everything is going smoothly. Investing in property is very time intensive in the research and property selection phase, however the management phase shouldn’t take you too long at all, especially if you follow a few of the tips below.
Get your team in place and beware the opportunity cost of DIY
This is an obvious place to start, but in my experience many investors only get this partially correct. I’m a big believer in surrounding yourself with the best people you can find. For property investors, this means having access to a savvy mortgage broker, a property focused accountant, excellent property managers for each of your properties (area specialists, not generalists), a solicitor or conveyancer who is licensed in the area you’re looking to purchase in, and ideally a property strategist or buyer’s agent. I’ve written more about the importance of having a good team here.
There is a cost involved in hiring professionals, but this cost needs to be understood in terms of the overall goal of investing. In the same way that we use banks to access funds that can help us leverage our equity/cash to buy assets that we wouldn’t normally be able to afford, when I’m engaging a professional I’m looking to leverage their knowledge and experience to generate returns that I wouldn’t normally be able to achieve. Just because you can do something yourself doesn’t mean you should. A classic example is self-managing. I’m more than capable of self-managing my local properties, but that would be an inefficient use of my time. My time is better spent on higher value tasks, like helping clients find properties, and I’m more than happy to pay an experienced professional to manage these properties for me. This business like approach should be adopted for every task associated with managing your properties. Always consider the cost in terms of both actual dollar cost and the opportunity cost of your time.
Trust, but verify
Following on from the above point, I like to leverage professionals whenever I can. But that doesn’t mean a set and forget policy. The way I keep on top of my properties is to set a reminder for the 1st of every month in my calendar. On that day, I open each of my statements (which I receive via email and move to folders as they come in during the month) and check the property rental statement line by line.
I use a very simple spreadsheet to record the actual rent received versus the expected rent, and then record each cost for the month in the same spreadsheet. This will include regular property management fees as well as periodical expenses such as rates (tip: I get my property managers to pay all my costs with the exception of insurance. That’s just too important to outsource in my opinion) and irregular expenses such as repairs and maintenance. I check each expense to make sure it’s in line with previous expenses (if regular) or that it’s in line with the quotes (if a one-off cost). Finally, I then add everything up and make sure the expected amount is actually what I have received in my bank account. All in, it shouldn’t take you more than 15 minutes or so per property per month.
In addition to this, I like to keep in regular contact with my property managers to make sure everything is OK. This is normally a quick email or a phone call a couple of times a year. Things I’m looking to find out are around market rent versus my rent, any upcoming maintenance issues and generally getting an update on the local market.
With regard to mortgages, interest rates change regularly and it can be difficult to stay on top of things. I lean heavily on my mortgage broker to help me make sure the interest rates I’m paying are competitive. This doesn’t mean we always churn loans to get the cheapest deal, but it does mean making sure the loan product(s) you have are still suitable for your needs.
Understand equity and leverage
Property investing is as much about buying property as it is about getting access to finance. Standard residential real estate has traditionally been well regarded by Australia’s banks and financial institutions, and as such the amount you can leverage against your property is significant. Over the years I’ve used 80%/90%/105% loans, depending on the property and finance environment in play at the time.
From my conversations with hundreds of investors and would be investors, I’ve found that many investors fail to understand exactly how they should approach the subject of equity and leverage. In the same way that we need to look at opportunity costs when choosing when to go down a DIY route, it’s important we also understand the opportunity cost (alternate use) for our funds (equity or deposit).
Recently I’ve noticed a rush by some Buyer’s Agents toward very high yielding residential properties, in suspect locations. The idea here is to maximise short-term cash-flow so as to be able to prove to the bank you have extra serviceability. What this fails to take into account, however, is that without growth, you won’t have a deposit for the next property. Also, it often fails to appreciate the importance of return on equity, in an overall sense. High-yielding properties have a place in portfolios, however it’s important to understand how they relate to the other properties you own and your future goals and they’re often better left for later on in your portfolio. Alternatively, considering investing in a high-grade commercial property may be a better solution long-term, depending on your situation.
Have a long-term plan
If you’ve read any of my other posts, you won’t be surprised that I included this. To me, the very first thing that we need to get right is having a plan to succeed. This is arguably the most important business lesson that we can adopt when investing in property. This allows us to set the goal and invest only in properties which help us achieve that goal. Anything else is just noise, and in property, there’s always plenty of noise.
Please note: the above information and analysis does not constitute financial 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 should be undertaken on the basis of this information without first seeking qualified and professional advice.
