7 Golden Rules of Property Investment

[Brendan]

Found this great article from a very reputable entrepreneur in the UK, well worth reading especially given the current climate in the property industry in the UK.

James Caan's seven golden rules of property investment - Telegraph (http://www.telegraph.co.uk/property/3484488/James-Caans-seven-golden-rules-of-property-investment.html)

I think we can apply these rules to the Aussie market.. thoughts?

[Slade]

I tend to agree with some points, such as buy quality in premium areas and you will always do well.

What people tend to forget is property is a long term game, unless your a flipper in a rising market it can be pretty hard to make fast money in property.

[JamesGG]

What people tend to forget is property is a long term game, unless your a flipper in a rising market it can be pretty hard to make fast money in property.

I wrote a post on another forum recently, which I'll copy and paste here. The way I see it, property doesn't have to be a long-term game. One of my main philosophies is that potential is limited only by imagination; this goes equally for property deals. Falling and flat markets, like those we see in many places today, are excellent times to make quick money out of property.



I'm not going to outline exactly what I have or haven't done. But, will mention some of the things that I have done differently, or seen others do differently, to get some good results. This is by no means a comprehensive post but hopefully enough to generate discussion.

For those that didn't see the other thread (of which I apologise for taking slightly off-topic), this discussion is on the back of my comment that "two years is too long" to get my money plus profit back out of a deal. So, that means we're looking for >100% CCR (cash-on-cash return) with two years *max*.

We'll look more at property than shares or business for the moment. 'Tis a property forum, after all, but I have as much interest in those two asset classes as I do in property these days.

First thing is buying below valuation. This doesn't necessarily mean buying below 'market value', or below vendor's asking price. For the pedants amongst us, I acknowledge that purchase price *must* equal market value. What I mean is as stated, buying below valuation. I have seen people take this further and use a LOC to fund the entire purchase price, then refinance a few weeks later at the higher valuation to free up the difference.

At the very least, you have a cushion for if the market does fall a little.

On that note, waiting for the market to rise naturally, especially at the moment, doesn't make any sense to me. Simply holding property for the long-term is not necessarily a winning lotto ticket. Creating value, either by renovation, strata process or subdivision, can force the value higher even in a flat market. In a rising market, you get the best of both worlds.

I also have no aversion to selling property. It creates cashflow which can be reinvested without affecting serviceability like refinancing can. Refusing to do so just because it temporarily reduces the asset pool is forest for trees, IMO.

A number of people I deal with buy three or four properties a year. They only plan to keep one long term; the others are deliberately designed for resale at a profit, which keeps one - or both - partners at home and not having to work in order to fund their investments.

The way I see it, long term investments are simply ones that I plan to hold for longer periods of time than others - the same rules still apply. So, if I'm not getting my money back out of the deal with a decent profit within two years, then I'm not interested. The ones that I have held long term have been refinanced to get the deposit, plus profit, back out of the deal. They're also positively geared.

One commercial deal has seen the yield high enough to achieve that goal in rental receipts alone. Nice.

Using vendor finance can be another strategy. Either by asking the vendor to fund the deposit, or, flipping a property before settlement under a wrap-style arrangement.

Joint ventures to allow more people into the deal that each could not do alone can be worth looking at under the right circumstances. I think Dazz posted one such deal here recently where he's going to nett some pretty healthy profit despite not owning the whole thing.

Renting properties by the room instead of to one family can also achieve high yields. I know another investor who doesn't even buy those properties - she just leases from the agent then sublets by the room. She's got quite a few of these now and does that for a living.

Yes, any number of things can go wrong with any of these ideas. I can appreciate that. It's a risk / reward thing. Protect the downside, be aware of the potential upside and there is some good potential to make some good money out of real estate in a short amount of time. IMO, the only difference between gambling and investing is how much you know. I don't pretend to know it all - that's why I'm still here, to keep learning - but I know enough to say otherwise when someone tells me that gambling is the only way to make quick money.

I hope that helps to explain my stance a little. Basically all it comes down to is a little imagination and a little creativity. And, an open mind.

[Brendan]

Great Post James!

I have recently been looking at ways of making a decent income from property other than just rental yields, and flipping has always appealed to me.

I guess one of my questions is how to fund the cost of the property while you are doing the renovation? and banks don't necessarily enjoy lending to people that don't have a full time 'stable, 9-5 income'

How would we overcome some of those obstacles?

[JamesGG]

I guess one of my questions is how to fund the cost of the property while you are doing the renovation? and banks don't necessarily enjoy lending to people that don't have a full time 'stable, 9-5 income'

How would we overcome some of those obstacles?

Thanks, mate.

The most common circumstances around these sorts of deals that I see are where one partner is working, and the other is investing full time. Beyond that, it could be a matter of lo-doc loans and / or having an established position in the market first to draw down on existing finance. The long settlement idea can also mean finding a buyer before taking possession and organising a simultaneous settlement at the higher price, pocketing the difference.

Funding can come from anywhere; cash, lines of credit, vendor finance, long settlements. Any number of options, really.

[Slade]

I suppose you could also do one or two deals why you are working full time to get the cash flow and capital together.

What about CGT JamesGG? wouldn't that play a big part in this strategy in a flat market? If you weren't able to add enough value through a traditional flip to cover CGT, then would it even be worth it?

[JamesGG]

What about CGT JamesGG? wouldn't that play a big part in this strategy in a flat market? If you weren't able to add enough value through a traditional flip to cover CGT, then would it even be worth it?

CGT is only an issue if you make a profit; ie, if you don't add much value, then you won't pay much tax either.

Tax is simply a cost of doing business. It should be factored into the calculations but will only ever be a percentage of profit.

In some cases, yes, tax and other costs can render a deal pointless from a profit point of view. Naturally it's best to avoid these deals where possible in favour of something that makes more sense. Should it come about unexpectedly, then we learn from the experience and don't make the same mistakes again :)

As I mentioned above, there is inherently more risk in trying to create quicker profits. For me, that risk is worth it; for others, it may not be. To each their own and whilst my own style works for me, it's not designed to work for everyone. I'm just too impatient and my attention span is too short for anything long-term!

[abd]

Location is always numero uno when it come to buying property. if you buy in for the long term you will always come out nicely at the end.