You all know someone with an investment property, in fact there are a significant number of landlords throughout Australia that have invested in a rental property, and that is where there investment journey seems to end!
We see this a lot, and believe there are two common reasons why people don’t go past one property. Firstly, it’s generally a lack of education and training about how to start and build a property portfolio, and Secondly, it’s fear of the unknown – which is often brought on by naysayers and a genuine lack of understanding of the risk.
Most Australians with regular income and good job security are in a position to own multiple investment properties, provided they acquire properties that have a good income stream to support the required serviceability of the property loan.
Buying multiple properties needs to be seen and understood as a strategy before most clients will see the need to purchase more than one. Investors really need to have a clear goal with their property strategy, and really take the initiative to research the property market themselves and find the hidden gems, rather than just attending a property seminar to purchase someone else’s idea of the perfect property for them.
So what the statistics say about rental property ownership?
As property ownership data is collected independently, through various authorities and researchers in each state and territory, gathering accurate, current statistics is a little hard to come by. However, we do know a couple of things for certain.
Firstly, the most recent Census data – compiled in 2011 – confirms that there are roughly 1.8 million landlords in Australia. Secondly, we know that these property owners provide accommodation to roughly 27% of the nation.
But that’s where the hard data trail ends, and the statistics begin to take on an anecdotal edge.
When you crunch the numbers, it’s clear that with around 1.8 million landlords and a national population of roughly 22.5 million, it would place the official landlord percentage at 8% – and that’s assuming that every landlord owned only one property.
But many investors do own more than one property, and while it’s impossible to know with certainty, we can assume that less than one out of every 20 Australians is a property investor.
Furthermore, the total number of people who own multiple investments is thought to be staggeringly small. In fact, many experts estimate that only 1-2% of all landlords are multiple homeowners.
Why is this? Why do so many Australians invest in one property, and then fail to progress any further with their real estate goals?
It could be attributed to first-time property investors’ success – or lack thereof. Many people’s first experience with property “is quite often not a fantastic experience,” confirms Sam Saggers, director of Positive Real Estate, who says this can turn them off the idea of investing again.
“Around 80% of first time buyers purchase a property based on an area they might know, rather than on researching the fundamentals of the market, so they don’t necessarily make money out of their first transaction,” he says.
“What they end up with is something that costs them money and that they don’t particularly like any more, and it sours the idea that property is a good wealth creation strategy.”
Reasons why investors don’t move forward
It makes sense that if you invest in property and don’t make a decent profit – or worse still, you lose money on the whole transaction – then you’re hardly going to be rushing back to do it all over again.
“The main reason I believe people don’t go past one property is that they don’t fully comprehend how property investment creates a retirement income,” Lomas explains.
“Most people are aware of the need to invest for their future and property seems to provide a comfortable option, which takes little effort and requires no change of attitude or action by the investor. So, they buy one and think ‘I’ve sorted my future’. But many of them eventually sell before retirement, because buying that one single property did little to change the outlook for their retirement – and most likely came with more headaches than they expected.”
Having a negative experience the first time around isn’t the only thing that halts investors in their tracks, with loads of other factors stopping buyers from moving on to property number two:
1. Fear of making a bad decision
When you invest in property you’re dealing with huge sums of money, so you naturally want to make the best possible decisions. The weight of this responsibility often holds investors back, resulting in what is commonly known as “analysis paralysis”.
“Too much information – much of it confusing or outright contradictory – makes it difficult to make a decision, and potential investors can get bogged down in the detail,” explains Ian Hosking-Richards, director of Rocket Property Group.
“People can also tend to dwell too much on the potential downside of investing and in doing so; they often lose sight of why they are investing in the first place. If all you can focus on is what could go wrong, it hardly puts you in a good frame of mind to go out and make a purchase.”
There are several different facets to being a landlord and investors can fret about the ‘what if’s’ before they even eventuate, he adds.
“People worry about things like, ‘What if I can’t get a tenant? What if I do get a tenant and they trash the place? What if interest rates rise?’ These are the questions that many would-be investors continually go over in their minds,” Hosking-Richards says.
“This, together with the well-meaning but negative comments of friends and neighbours, and doom and gloom headlines in the tabloid press, causes many potential investors to get buyer’s remorse before they have even made a purchase.”
The solution: “It’s important at the outset to have a clear strategy, as there are lots of ways that you can make money out of real estate, and beginning your property search with no clear strategy often leads to confusion,” Hosking-Richards says. “Once you have decided on a definite strategy, you can compile a list of criteria for your intended purchase. Sticking to the checklist will allow you to make an objective assessment.”
2. Fear of taking on debt
As well as a fear of the unknown, many Australians fear something much more tangible: debt, and its brutal ability to crush them financially.
“People have a fear of going into more debt and they get scared by big numbers when they’re looking at investing $500,000 or $1m,” explains Rich Harvey, CEO of propertybuyer.com.au.
“They think that by buying more property, their finances become more risky. In actual fact, the opposite is true – if you buy well located property you’re going to have less risk, because you’re setting yourself up for financial security.”
Those investors who struggle with this fear must educate themselves about what property investing actually involves, he adds, while also focusing on finding the best deal for their personal situation.
“It’s vital that you have a very specific criteria to identify the right property, whether it’s a high-growth investment, or a cash-flow investment, or combination of both,” he says.
The solution: The best way to counteract this fear is to fight it with facts and figures. This means working out exactly where you stand right now, and what you’d like to achieve in the next five to 10 years.
“Set an appointment with yourself – if your portfolio is only one property, it’ll be a quick meeting!” Harvey jokes. “But set aside this time to go through your property costs and income, and to talk to your accountant and mortgage broker about what you want to accomplish. Tell them, ‘I want to buy again’ and see what competitive loans are out there and what you can borrow – before you even begin looking at properties.”
3. High personal debts
There are plenty of investors who would like to make a move on property number two, but they physically can’t, due to their financial position.
Personal debts such as credit cards, personal loans and car loans chew through your borrowing power and can make banks reluctant to lend to you, especially if you’re having trouble staying on top of all of your repayments.
“It is important to distinguish between ‘good’ debt and ‘bad’ debt. Bad debt is non-deductible and often used to purchase depreciating assets, like credit card debt, car loans, and even your owner occupied home loan, if it means that it will take longer to reach financial freedom,” Hosking-Richards explains.
“On the other hand, taking on ‘good’ debt is very tax efficient and ensures that your assets are working hard for you.”
Understanding the relationship between debt and equity is vital if you are serious about achieving financial freedom, Lomas adds.
“Learning how to more efficiently repay debt is crucial so that overall, the gap between your debt levels and property values continues to grow, even when markets are slow.”
The solution: In Lomas’ view, investors need to educate themselves about their personal finances before they even contemplate growing a property portfolio. “You should never start a portfolio until you fully understand debt and have a firm plan in place to undertake rapid reduction of it,” she says. “Comfortable debt levels are crucial.”
4. An unsupportive partner
It happens all too often in a relationship, where one partner is keen as mustard to take another step up the property ladder, while their other half isn’t quite on the same page.
“I meet with husbands and wives all the time, where one of them is gung-ho and the other is conservative,” Harvey confirms.
“They ask, ‘How are we are going to afford another property?’ Little do they realise that if they buy a cash flow property, it could put $9,000 back into their bank account each year.”
This is where education and research is crucial, as is having the right financial and investment advice – especially if either party in the relationship has been burnt by property in the past.
“Some people don’t give a property purchase as much thought as choosing a holiday destination, but it’s very expensive and you need to do your due diligence,” Harvey adds.
The solution: It might pay to talk to a mentor or independent advisor, Harvey suggests; someone who is successful in property and who can help you take the next step. “It’s also a good idea to read investment books and magazines, and to read stories of other investors who have overcome obstacles.
Inspirational stories from other people who have moved beyond the ordinary will help you to see the potential property has to offer, so consider attending seminars and viewing webinars online to build your education.”
5. Low borrowing power
Another obstacle facing would-be property moguls is their lack of borrowing power – or at least, their perception that they can’t borrow any more.
“An investor might have talked to their accountant, who advises that their serviceability is low. Or they go to one bank, rather than speaking with a broker, and they’re told they can only borrow $200,000,” Harvey says.
“They hit this type of obstacle and won’t press through it when in reality, they still have plenty of options.”
The solution: An experienced broker could look at your financial situation and identify opportunities for you to leverage further. “It’s always my view that you should go to a broker and get the best deal that way,” Harvey says. For instance, by converting your current property loans from ‘principal and interest’ to ‘interest only’, you could free up thousands in extra borrowing power. Consolidating all of your credit cards to one account and/or reducing your credit card limit could have the same effect.
Article provided by Your Investment Property Mag, click here to view original.