Strategies For New Investors
Whether you want to dip your toe into the market or jump right in, Joanna Jefferies finds out the top strategies for new investors.
31 December 2017
It’s a challenging market for investors wanting to get their foot on the property ladder for the first time – but it’s not impossible. If you can save, beg, borrow or steal the 30% minimum deposit to secure your first deal, and you buy well, then you’ll automatically have the leverage you need to grow your portfolio further. That’s the beauty of investing in property.
But knowing which property will be your best bet can be a daunting choice, and fear of getting it wrong can lead to “paralysis by analysis”. We spoke to property coaches and finders and an investor who has gone from zero to owning a portfolio of properties to find out the strategies they use for investment success.
Always Cashflow Positive
When the market has become unaffordable and the prospect of capital gains has diminished, there’s only one yardstick needed to measure a prospective buy against: cashflow. What you’re looking for here, says Property Investor Centre’s Shane Allen, is a property that is cashflow positive, meaning that at the end of each week you’re making money, rather than losing it.
But the problem with this buying criteria is that in many markets, standalone properties that cover the bills just simply don’t exist. Allen says this is where new investors need to think outside the box.
“It’s all about cashflow and yield so we like properties that have two houses on one title, or home and income – we also like blocks of flats.”
It’s something that new investors don’t often consider, but buying multiple-income, or property that can be developed to become multiple-income can be a good way to both cover the bills and achieve a cashflow surplus that will increase your servicing ability for your next deal.
The downside to multiple-income? “Traditionally standalone houses will be more popular with tenants and give you more capital gain, but positive cashflow is a fundamental strategy that just keeps [giving],” says Allen.
Buy With An Upside
If you can’t buy multiple-income property straight off the bat, you may want to consider property with an “upside” – industry speak for a property that can be developed further to realise its potential. It may be an old wreck that can be cheaply renovated to realise equity gains; a two-bedroom home that can be converted into a three-bedroom home to increase the yield; a property that is in a suitable location for short-term holiday letting; or a property that can be subdivided or have an ancillary dwelling built to multiply income streams.
And if you can’t afford this type of property at least “try and get a good deal,” says Allen.
But how do you secure a good deal? Well, if you align yourself with good real estate agents, then you’ll be the first one to know when a new “deal” is coming to the market. But equally, if you’re observing a specific location’s sales prices over time, you’ll come to recognise when a property is being sold under its market value.
Alternatively you can have valuations done for prospective properties to ascertain the real value of the property.
Joint Ventures
When deposits or servicing aren’t at the required level, it’s common for first time investors to consider going into a joint venture (JV) with a friend or family member to enable the purchase of a property.
But, One Agency Wayne Densem Realty property investment specialist Wayne Densem advises to proceed with caution, and if you can buy alone, you should avoid JVs.
“The reason that things fail is if you go into it with your best friend and your best friend doesn’t start doing what they said that they would do, then your friendship’s at risk,” says Densem. “I say to people, don’t go into a joint venture with your brother because, emotionally, it’s risky.”
In contrast, borrowing equity or deposits from friends or family members tends to work well – “provided you do it on a business basis so that everybody knows exactly what the deal is”.
If parents are going to be guarantors for a loan, Densem recommends using a “limited guarantee”. This means that for example, if a parent was lending their daughter $25,000 to bring her deposit up to the right level, then her parents would only guarantee the $25,000 and not the entire loan.
‘It’s a fabulous way of growing wealth and it’s a simple way of growing wealth, but you’ve got to have all your ducks lined up and the right advisers’ WAYNE DENSEM
The Foundation For Investing
It’s important to seek out the right information from the right people, says Densem, because investing is not an exact science – it depends on each investor’s circumstance.
This means speaking to a range of experienced professionals as part of your due diligence process, before you buy and not after.
“It’s a fabulous way of growing wealth and it’s a simple way of growing wealth, but you’ve got to have all your ducks lined up and the right advisers,” he says. This means avoiding the DIY route and “interviewing” your team – your accountant, lawyer, property finder or coach, and mortgage broker to find the people that have the most relevant experience and who best align with your personal goals.
As a starting point, speak to investors, friends and family about who they recommend and begin by meeting with those professionals, before deciding who is on your “dream team"
Attitude Is Everything
Densem believes the most important thing to have when looking to invest, is the right attitude. This means using your “business” head, pushing emotions aside and doing the best for your tenant.
Auckland investor Lorraine Rishworth is one such investor with an excellent attitude. When at age 48 she found herself newly single with two daughters in tow and without a home, she became determined to set herself up for a financially secure future.
Rishworth worked in accounts administration and had been wanting to get into property for years. She started going to workshops and “signed up to just about everything I could”. Through her research she met mentor Maree Tassell from iFindProperty who passed on lots of valuable advice.
While she was networking and researching Rishworth recorded a goal to be mortgage free by the time she was 55, but had no real plan to achieve it.
Her first focus was to purchase her own home in Auckland, which she managed to do in 2011. She used the following year to educate herself on property investment and get herself into a place financially, where she could move ahead with her investment plans.
In 2013 she took the plunge and bought a place in Rotorua – “I was terrified of over-committing myself so I didn’t want to buy in Auckland,” she says.
The property was $132,000 and she was so motivated by her new purchase that only a matter of weeks later, she bought another similar property in Rotorua.
“There were times when it was an absolute money juggle – robbing Peter to pay Paul, praying that my pay would go in and that no surprise bill would come out,” says Rishworth.
This was mainly due to maintenance issues cropping up in both houses and tenants occasionally falling behind on their rent.
But Rishworth had a steely determination to achieve her financial goal and she managed to buy a fourbedroom house in Hamilton’s student area a year later for $217,000. It had some water damage and she spent $10,000 on repairs.
A year later she borrowed against that property to buy another Hamilton unit and since then she’s also purchased a unit in Lower Hutt.
The Hamilton market grew in leaps and bounds since she purchased the student flat and two and a half years after purchasing it, Rishworth sold the property and was able to pay off the mortgage on her family home in Auckland – she’d achieved her goal of being mortgage free.
She says it hasn’t been an easy route but it has worked out in the long run for her, due to her great team, her mentor Maree Tassell and gleaning information from Auckland Property Investors’ Association.
Invest In Education
For new investors, who like Rishworth, don’t have a background in property, it’s crucial to invest in education before making the leap, say both Allen and Densem.
It also pays to familiarise yourself with market drivers and movements before jumping in, says Allen, who recommends investors proceed with caution in the current market.
“It looks like there are still strong drivers for property – but just be cautious. It comes down to being educated before taking action.”