How To Make Money From Property
By Adam Grocke
Australians have always had a love of property. The fact you can see it, feel it and change it, makes it a desirable investment for many. Throughout this series “how to make money from property, I’ll explore the best proven strategies I've either used personally or advised my clients on. Having helped almost 1000 clients to purchase, renovate, develop or invest in property, I've witnessed the majority of pitfalls and identified the key contributing factors to success.
To start, I need to explain my criteria for the chosen successful strategies.
- It needs to be achievable for the average Australian and take into account average wages, savings, living expenses and investment time frames.
- Risk vs reward needs to be moderate and acceptable to the average Australian investor. The general rule of thumb is that higher risk achieves higher rewards; this is true, however, higher risk also greatly increases the likelihood of losing money.
- Minimising economic risk. All investment carries economic risks for example if there is a property crash almost all investment strategies will lose money and vice versa. The key is to focus on what you can control and put in place a “buffer” or “plan of attack” if things do turn bad. I'll elaborate on each strategy’s buffer later on as they differ between strategies.
Ok, let's get started with key points that separate a good property investor from a bad one.
- A good property investor makes decisive decisions assessing objective data not a gut feel. You need to break the tie between emotion and decision making as emotion will always bias your personal preferences which may not result in the best outcome. A good property investor will identify when emotion is present and will seek advice from a third party to get an unbiased opinion. Good property investors also don't invest for any other reason but to make money. It's not an ego building exercise to build a 100 property portfolio as this may not be the best way to make money. Too many people are focused on the number of properties they own instead of their nett worth, how much money each property is making and is each property really performing.
- Some of the decisions you will make will be the biggest financial decisions of your life. It never ceases to amaze me how unprepared people are. People put more preparation into their weekly grocery shopping lists. Do a feasibility for each property, do your research, get advice and get a second opinion. Plan for the best outcome and the worst.
- Be patient
- Nothing happens quickly so be prepared to wait for results. If you are impatient you will make wrong decisions that can cost you money in the long term. There will always be another opportunity around the corner.
- Avoid BBQ advice
- Almost every story you hear at a BBQ is exaggerated or is missing key information. If the person isn't a professional charging for their time, then take it with a pinch of salt. For example, I’ve heard people explain their strategies on how they made money and it was very clear that they only made money by luck, as they made several key mistakes but the market grew strong and hid the losses. An example of exaggeration can be accidental, EG. I've heard someone say they made $200,000 from a property in 5 years. If you break it down this just isn’t true as they didn’t include purchase costs, holding costs, maintenance expenses, sale costs (if they were to sell) and Capital Gains tax (CGT). Just because they purchased for $200,000 and now it’s worth $400,000 doesn’t mean they have made $200,000 profit. In South Australia the figures would have looked like this: they would have paid approx 5% purchase costs (stamp duty, fees etc), net holding costs assume $4,000 per year, 2.2% agent sales fees and approx $10,000 marketing and then CGT of the profit. After all these expenses they may be left with approx $72,000 in their pocket once sold.
So how can you make money from property?
There are 4 main strategies to make money from property outlined below:
- Buy and hold
- Add value
I’ll explain each of these in detail, including the pros and cons, in separate blogs. The key thing to know is that you must have a very clear strategy and know exactly which strategy you are going to proceed with. If not, save yourself the stress and hassle and give your money to charity instead of losing it. I hope this blog and the proceeding blogs give you enough information to avoid the mistakes I see day to day, and most importantly, help you make money from property.