PPA News and Blog

20 Years of Property Investing

I have now been in property for over 20 years. As a valuer, buyer agent, property adviser, property researcher and most importantly as a property investor. Working with medical professionals, expats, business owners and high net worth individuals. I have bought over 1000 properties for clients, I have seen many property investors succeed and others with the potential for success, fail. I have reviewed every strategy, bought in every state of Australia, and bought in all major asset classes of property

Whilst things in the property market are always changing & we are still learning every day I have come to appreciate that there are 7 things that don’t change when it comes to building a successful portfolio.
Most people we see have a goal to buy property, where that should never be the goal – the goal should be to make money; followed by two more questions. How much money? And by which date? I see people all the time who have 5 or more properties – with zero equity and in some cases negative equity. Only then do most truly understand that what they really wanted to do was make money. Trying to impress this upon new investors is always a challenge. You can’t develop a strategy without a goal, the goal determines the strategy.
When most people think of investing in property, they think residential. They buy in their local market where they can see it, which seems rational. But as an investment, if you applied that same rationale to stocks you would only buy shares in companies that were based in a 5 km ring of your home. Not so rational if the goal is to make X amount of dollars within X time frame. The strategy’s purpose is to find the pathway to your goal which carries the least amount of risk, encompassing your income, your timeframe, market conditions & effective property investment strategies at that time. Through this planning process you may work out you need to adjust your timeframe or end goal, because to get there you may have to take on too much risk. It’s normal to go back and forth and for goals to change slightly over time as life changes outside of property. The cornerstone of the strategy however is risk management, to always protect the downside first – this permeates from the macro strategy right down to the due diligence on physical assets.
Cash buffers
This is the central piece of the risk management strategy and provides the essential ‘sleep at night’ factor. With debt comes risk, and we need to manage this debt with the greatest respect. A cash buffer provides you time to work through any issues such as a drop in household income, loss of employment, sickness, rising interest rates, long vacancy or a combination of these things happening at once.  COVID-19 is an excellent example of where multiple things can go wrong at once. On average we have had a major financial shock every 10 years, so we need to be prepared for this, it should never come as a surprise. A cash buffer enables you to have the least amount of stress during these times and most importantly enables you to avoid being in a forced sale situation, which is the worst place you can be as an investor. As a general rule we recommend a minimum cash buffer of 4-6 months, but in harder economic times or the closer you are to retirement we will recommend you to increase your cash buffer.
Personal Income
Investing in property will eventually provide passive income, but between then and now you need to provide a portion of your income and savings to the property portfolio. Like all things in life, you reap what you sow. And 20 years of sowing is in most cases what it takes to replace your income. Ensuring that your household is consistently bringing in income and that income is rising over the years, is one of the keys to growing a successful portfolio. Banks are currently lending at roughly 6 – 7 times household income, so if you’re on an annual salary of $80,000, your total borrowing capacity will cap out around $500,000. This would be enough to buy 1 property in a regional town. If your household brings in $400,000, not only will you be able to borrow over $2.5m, you should also have the ability to save aggressively & pay down debt aggressively. So focusing on your household income growth is essential.
I get so frustrated when you read property books and experts talk about buying below market value. In my experience, to have this as the strategy is fool’s gold. Primarily because buying under market value is one of the hardest things to do if you have a quality asset in a market that is starting to rise, which is exactly what and when you should be buying. When we talk about value we look first at where this suburb is likely to be in the short to medium term. This is done by reviewing the key fundamentals: Demand Vs Supply, Affordability & Confidence to see if the current prices show “ value” given the dynamics of the key fundamentals. Secondly, our focus is not buying under market value, but trying to buy under replacement cost. When you buy under replacement cost, your downside risk is limited and the market is generally in an undersupply as developers don’t develop when they can’t make a profit.
There are 3 elements to quality, the suburb, the location within that suburb, and the property’s physical attributes. Without oversimplifying this point,  the primary reason why quality is essential is because quality property can be rented or sold in below average or poor market conditions. Thus providing liquidity and cash flow in all market conditions. The secondary reason is in hot markets you frequently see premiums being paid on quality property well above true market value.
This process will take time. Any market can go up, down or sideways in the short term. However over the long term all markets must move to the fundamentals. So bet long term and bet with the fundamentals. When you find a market that shows value sometimes that market can increase 75% 5 years after you enter, and other times it will take 10 years. Moving forward it is likely that growth will be slower and these cycles might be longer than what we have previously experienced. If you’re not prepared for this you have to question whether investing in property is right for you. The number one issue we have experienced with our clients not achieving success is them not being in their property assets long enough. Unfortunately the market does not care about your timeframes, no individual can control it, we can’t speed it up. So you need to have faith in the strategy and give it time.

Be clear about what you want from investing in property, have a strategy, find value, buy quality, constantly work on your income and with time you will succeed.
Yours Sincerely,
David McMillan
Director Performance Property