In order to do good deals, you need to be able to recognise them so you can act fast and snap them up before anyone else gets to them. And in order to be able to recognise them you have to become a market expert. By this I mean you need to know about property values, rental values, what type of renovations to undertake and how much value they will add.
If you want to build a large portfolio you need serviceability (i.e. you must be able to service your debts and make your loan payments), otherwise the banks won’t lend you the money you require to continue to move forward at a good pace.The way to create that serviceability is with cashflow properties. In my experience I found I needed 8–10 cashflow properties before I was ready to buy a capital growth one, although a ratio of 1:4 is often recommended. The truth of the matter is that the number of cashflow properties is pretty much irrelevant; it is the amount of surplus cashflow that you have which really counts. The point here is that I began my investing looking for high cashflow properties that would give me a minimum 10% yield. In order to find them I had to know what I was looking for, which properties would give me my desired cashflow, and which ones would send me broke if I bought them.
Location Location Location
I live in West Auckland, and it was here that I began my search for investment properties. The reason for this was not just convenience, but also because at that time – late 2003/early 2004 – you could still get good cashflow in this area. Many people will invest in their local area because they are familiar with it, which is fair enough as long as it works. However, it very quickly became obvious to me that West Auckland was not the right area to invest my time and money in because property prices were starting to increase, and rents were not following suit. And so I shifted my focus to South Auckland where the yields were much better. In this part of Auckland the vast majority of the population rents rather than owns their homes, which makes for excellent investment opportunities. It tends to be a lower socio-economic area, but investing there is not nearly as scary as it sounds. Many of the suburbs are pleasant, the houses are in pretty good condition, and the majority of the occupiers are good tenants. There is still the occasional street filled with troublemakers, but those are easily avoided. And while I’d call South Auckland predominantly a cashflow area, you can still get good capital growth here as well. I know of a property that was bought for $240,000, and sold for $320,000 just 12 months later. You’d have to agree that’s a fairly healthy increase in value!
To become a property market expert you need to focus on a specific area to study and find out as much as you can about it, even if you’re working full-time, you could easily spare a couple of hours over the weekend or after hours, especially during the daylight-saving months. And if it ends up taking a bit longer than six weeks to become an expert, it is still vital to your investing success that you invest that extra time and stick at it.
The above post is based on the book “The 15 Million Dollar Man” by Sean Wood, to read more click Property Investment and download 2 free chapters.