Successful Investing – Building a Portfolio

In Professional help by Jeff OsborneLeave a Comment

There seems to be a disconnect between what is myth and reality when it comes to the number of investment properties that people own.

We sometimes hear about “greedy” investors who own dozens of properties when this is not really borne out by the facts.

But did you know that about 70 per cent of investors own one solitary property?

And of the 2.1 million property investors in Australia, only a tiny percentage – around 20,000 people as it turns out – own six or more investment properties.

Of course, only owning one investment property isn’t necessarily going to enable you to achieve financial freedom.

Which means many Australians who try and secure their financial future through property investment fail.

So why don’t investors own more properties?

Well, generally it’s because they make one of the following mistakes, which limit their chances of growing a portfolio.

1. Property investing as a hobby – not a business

 Australians tend to love property, they love going to open homes and auctions.

They love the excitement of buying a property and renovating it.

They love the thought of becoming a property mogul. In short…they’re having fun!

That’s not the way to become rich through the property – you need a business mindset.

If you’re looking for fun go bungee jumping, go trail bike riding.

Property investment should be boring, but the results can make the rest of your life exciting.

If you treat property investment as a business you won’t think as much about each individual transaction, but the big picture – your long term goal because property investment is a long term process, not an event.

2. No strategy

Following on from the point above, owning an investment property is not a strategy.

The problem is, most people become property investors without putting much thought into it.

Some upgrade their home and turn their old house into an investment.

However, that doesn’t mean it will make a good investment because they probably bought it for emotional, rather than objective, reasons.

Others buy a property in the comfort zone – close to where they live.

Don’t make the mistake many investors make and buy in your own back yard because you’re familiar with the location.

That’s really not a good reason to buy there.

In fact, a recent university study showed those investors who bought a property close to where they lived tended to buy underperforming properties and didn’t even get a price advantage on purchase.

You’ve heard it before – failing to plan is really planning to fail.

On the other hand, strategic investors devise a strategy – they bring their future into the present and devise a plan to achieve the results they want.

3. The wrong strategy

Almost as bad as having no strategy is following the wrong one. 

Residential real estate is a long term, high growth low yield investment.

Your strategy should be to use the capital growth of your property portfolio to grow a large asset base that will give you more choices in the future.

Yet many beginners chase cash flow or the next hot spot or try and make a quick profit by flipping. All recipes for investment disaster.

4. Changing strategy

Unfortunately, some investors get spooked when markets soften and rather than sticking to a proven strategy to secure their wealth creation through capital growth, they opt for something cheap and supposedly cheerful instead.

Rather than looking at what has “always worked” over the long term, they look for “what will work now.”

It’s no surprise then that their smiles turn into frowns when that inferior property underperforms down the line.

5. Unrealistic expectations

Another reason investors fail is that they’re not patient enough.

They’ve read too many stories about “overnight successes” and go into property investment hoping to make quick profits or thinking they can buy seven properties in seven years, or possibly ten properties in ten minutes.

In reality, successful property investment is a get rich slow process. It takes most investors a number of years to grow a big enough asset base to provide a cash machine for their retirement.

By then, though, many people have thrown up their hands and sold up because they had unrealistic expectations to start off with.

Too many investors look for that one big deal that will make them rich – property just doesn’t work that way. As Warren Buffet wisely said: “Wealth is the transfer of money from the inpatient to the patient.”

6. Getting sidetracked by the media

The 24/7 news cycle is hard to ignore and beginning property investors tend to be driven by fear and greed which is what the media thrives on.

During booms when they should be the most cautious, Fear of missing out encourages them to pay too much and during the property slumps when real estate is available at a discount fear of buying early stops them taking advantage of the opportunities available.

7. Not recognising that there are multiple property markets in Australia

While the media keeps talking about “The Australian Property Market”, there are hundreds and hundreds of property markets within Australia and there are markets within markets.

Each state is at its own stage of its own property cycle and within each state, there are multiple property markets separated by geographic location, price points, and type of dwelling.

And each of these markets is performing differently based on local factors including demographics, economics’ and supply and demand.

So listening to market commentary about the Australian property market or even the Sydney or Melbourne property market is far from helpful.

8. Not recognising that location does 80% of the heavy lifting of your property’s capital growth

There’s a reason estate agent keep going on about “location, location, location” but the problem is not all locations are created equal, and many investors don’t recognise the locational factors leading to capital growth.

9. Not owning investment-grade properties

Even in the right location, not all properties are “investment grade.” It’s important to own a property with the right attributes, such as owner/occupier appeal, low maintenance costs, good rental opportunity.

10. Doing it alone

Because everyone lives in a property, many novice investors believe that investing in real estate is easy, when it’s not.

They try to go it alone or fall prey to spruikers or marketers and soon they’re mortgaged to the hilt on a property that will struggle to grow in value enough for them to leverage from it.

On the other hand, savvy investors take responsibility for their own education, but they also understand that building a team of experts around them will help them succeed.

They know that they won’t ever know as much as the professionals and realise that it will take years and many transactions to gain a true perspective.

So they formulate a strategic plan, get the right finance and ownership structures to suit their needs and only buy investment-grade properties that will outperform the averages and then regularly review their portfolio’s performance to ensure they are on the path to financial freedom.

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