Location, location, location might be the most well-known property catchphrase, but according to the experts it’s not the first thing to consider when building a property investment portfolio.
Location should not be considered until after you have determined why you are investing, what you want to achieve from it and how you are going to finance it, according to property investment expert Jason Paetow, Managing Director of AllianceCorp.
He says investors are too often focused just on the area they want to buy in, which is one of the reasons many Australian property investors own only one property.
“A lot of people understand they need to go to the bank and get the money, but they are often more focused on the location,” says Paetow, guest presenter on the “Beyond Locations: Investment Fundamentals for a Portfolio Grade Strategy” webinar hosted by Hotspotting.
He says some of the best locations in Australia in terms of property price growth are expensive to buy into, and often don’t provide great rental yields, making it difficult for those wanting to build a portfolio to obtain finance for further acquisitions.
The first step in building your investment portfolio is determining your long-term goals and your exit strategy. This will then determine what type of property and which location are best for the individual to invest in.
This will be different for each investor, Paetow says.
“One property is just not going to cut it,” he says. “About 95% of investors out there have only one or two investment properties and the vast majority of those get stuck on one or two because of the finance,” he says.
“Either the banks are not going to lend them money or they (the investors) are concerned about cash flow.
“So, if we can educate people around how to finance their investments and give them more knowledge and support, that will give them more confidence to go out and make the right decisions when it comes to selecting the right types of properties that suit their personal circumstances.
“No one can recommend a good investment property without understanding the client’s goals, what they’re trying to achieve, over what timelines, and what their borrowing capacity is.”
Paetow says the individual’s finance strategy will guide them on what locations and types of properties they should buy.
It’s critical that the finance structure and chosen properties allow the investor to secure further properties, as they cannot achieve significant wealth by owning just one property.
“Normally that wealth comes from finding a way to grow a portfolio of properties over time,” he says.
“If they don’t focus on that outcome, they’re going to struggle with the banks in terms of finance for the second or third property.”
After finances are sorted, Paetow says then is the time to look at areas to invest. This requires consideration of all the standard property investment criteria – such as low vacancy rates, tenant demand, infrastructure, supply and other fundamentals which will drive price growth.
Paetow says many property investors believe a property with negative cash flow is a good investment because of the tax benefits. But having a property like that on your books can affect your borrowing capacity for your next purchase.
“By choosing certain types of properties, you can manipulate that borrowing capacity over time,” he says.
“When banks look at how much they’re prepared to lend you, it’s based on your personal circumstances, how much income you have, your expenses and your liabilities – but also the cashflows on the properties you plan to buy.”
Paetow says this is where many property investors become stuck, unable to buy another property and grow their portfolio.
“It’s all about which property is going to help you get into the second property quicker and then the third property,” he says.
It’s also important to remove emotion from the selection of an investment property.
While everyone is fascinated with the location of the next hotspot, that should not be the only reason an investor decides to buy there.
“We want to support a strategy that’s based on your goals,” Paetow says.