Are you thinking to dive in into the lucrative world of property investing? Before you plunge in, it’s wise to analyse some key fundamentals of property investment.
So what are the property fundamentals, and what makes them solid? Let’s look at what to consider when thinking of investing your hard earned money into bricks and mortar with a view to generating a less risky, more stable return over the medium to long term.
Always buy at discount
You’re securing equity at the point of purchase rather than following ‘buy and hope’ strategy. This gives you a cushion against market falling and also allows you to recycle your deposit & create infinite ROI.
Invest with a margin of safety
If you buy an asset, for example, an office space in Chennai for less than its real value you have a margin of safety. The best plan to lower risk is to buy investments at a price that is lower than the real or intrinsic value. A low price means greater upside appreciation if conditions are favorable. At the same time, a low price provides a margin of safety if circumstances are not ideal. Always plan on less than ideal conditions, something usually goes wrong.
Asset allocation is priority
Your asset allocation, how you divide your portfolio among different asset categories, will be the biggest determinant of your investment returns. If you place your money into overvalued asset categories you will experience poor long term returns. It’s important to overweight asset categories that are bargain priced and underweight or avoid asset categories that are expensive.
Invest for the long term
Short term investing is one of the biggest downfalls. The truly great investors realize if you buy an investment at a favorable price it may take time for the market to recognize its true value.
Long term investing is one of the most important investing principles because short term trading usually leads to poor long term performance. This is common because many investors let fear and greed cause them to make bad decisions. The long term will take care of itself if you make wise investment decisions.
Buy for yield, not capital appreciation
Many investors base their entire business model on capital appreciation and underestimate funding the shortfall in running their property portfolio. This is a very big mistake and a very high risk strategy to be avoided at all cost
Buy 2 BHK flats in Chennai on the basis that property prices will never rise, meaning your model is based on instant profitability: income from rent NOT just growth. Never buy on emotion – an asset is something that puts money in your pocket not takes it out (liability)
Get a builders report, get a valuation done, check the certificate of title and necessary approvals. Confirm that the price mentioned to you is true, same with rental assessments. Become a local expert in your area. Also ensure that your renovation costs will stack up. How much will the property be worth once renovated? Have you included void rates in your equations? What if rent decreased or interest rates increased? Are the tenants really paying that much rent?
You should be buying property to suit your strategy, and not working out a strategy to suit the deal. Does the property suit your deal profile? How will this property help you achieve your goals? You should know how much money you are going to make from the deal before you even buy the property.
Buy Existing, older properties
Existing property have established values over a period of years. There is no immediate depreciation from the forecourt’ syndrome with new build properties. Properties with the same condition are sold at the same price.
Numbers never lie
Don’t chase the deals; let them come back to you. Play the long game. This is not uncommon, and far better than trying to tie a price up too early and getting too emotionally involved and ‘wanting to get the deal done.’
Beginners are especially susceptible to this. Have a strict set of rules and do not deviate from them. If the numbers do not work for you, don’t think they won’t for another investor. Consider selling the lead on/packaging the deal up. Maximise your revenue streams!
Always selling your property
You make your money when you buy and not when you sell. The main reason why selling is a mistake is because you are transferring your wealth to someone else.
Now, we do believe that if your property is not performing well, or you have bought a property out of area or you can flip a low yielding property on a quick turnaround, then selling the property to reinvest in another better performing property project or to get out is a viable strategy.
Invest in what you know – the right type of property
Buying off plan & out of area – this is probably the biggest reason that often hurts new investors. Many investors are often hypnotised with the fancy artist impression of some beautiful luxury apartments by the sea: somewhere in an idyllic holiday location 3 years off plan.
Buying on emotion
“I love this place! It has so much…potential!” Big mistake! Many investors starting out, got fooled right in by those big, colourful, lifestyle brochures, new build and dreamy holiday homes. It’s emotional buying. This can get you in financial trouble quickly.
It’s obvious you will miss a few ‘deals’ on the way up, the more detached you are which is fine. But the more you stick to your buying rules and the fundamentals, the better cashflowing investor you will be.
Match your target rental audience
It is crucial to remember that an ideal property is not necessarily the same as your own idea of an ideal home – rather, an ideal investment is one which matches your target rental audience – students, professionals, families, etc. should benefit from this.
Estimating gross and net yields
If the property does not pay you monthly to own it you are taking on a liability. If the property does pay you each month (after all operating expenses plus debt then you can afford to own the property for a very long time.
To make the cash flow work you might need to raise the amount of equity you put in. You need to understand the underlying details and you have to be prepared to change the indicators as the ground shifts. Just be careful about lowering standards to chase business rather than sit on the sidelines.
If you have minimal capital of your own to invest, then leverage can help you. Leverage means using other people’s money to finance a significant percentage of your property investment. Leverage is an excellent way for new property investors with limited capital and experienced investors who wish to expand their portfolios at a minimal cost..
Invest for cashflow
Ensure the property is cashflow positive after all costs. The number of properties you own is vanity, the cash flow you make is sanity and the cash you got in the bank is reality.