8 property investor fundamentals

Calling all keen property investors! Here’s 8 fundamentals you need to know.

He has been investing in property for 20 years, so who better to learn from than my millennial property host, John Pidgeon?

Here’s John’s 8 property investor fundamentals to consider:

#1. Strategy

What is your strategy? People often hear this term ‘strategy’ and feel it’s a little…vague. Here’s some potential property strategies that may be your focus:

1. Capital growth - sometimes called ‘capital appreciation’, capital growth is the increase in market value of the property over time. Example: you buy a property for $500k, over the next 5 years it increases to $700k based on current market value. That $200k increase is the capital growth of that property.

2. Tax benefits - perhaps there’s a tax benefit to you owning a property (or several)? This could include depreciation, negative gearing, claiming interest on the mortgage, capital gains tax exemptions, and so on. You’ll have your accountant in your corner for this one.

3. Cash flow - adding cash flow to your life. This will be based around yield - what yield per year are you aiming for? Read point #4 to learn more about yield.

4. A combination of the above.

#2. Property class

The property class you look to invest in is determined by your strategy from point #1.

What type of property fits into your strategy?

The 3 classes to consider are:

1. “Blue chip” - you’ll hear this term used to describe properties that are typically high in demand and low risk because of their basically guaranteed return.

2. Class B - these are your good quality, set and forget, long term buy and hold properties. Not as in demand as your “blue chip” properties, but still great quality.

3. Class C - these are your fixer uppers, renovation-ready, development, high cash injection properties. Bit of elbow grease and cash investment needed for these ones.

#3. Price

This isn’t just about the price of a property - this is about all of the lending and spending aspects of your investing. This includes:

1. how much can you lend? Have an amazing mortgage broker in your corner for this.

2. what's your mindset and risk tolerance around spending? How much are you comfortable spending before it feels a bit too much, or a bit risky?

3. what deposit size do you need, and will it be cash or equity based?

4. what do you need to spend to achieve your strategy?

An amazing mortgage broker is crucial to navigating the price and lending aspects of your property investing, so book in some time with your mortgage broker before you make any moves.

#4. Yield

In simple terms yield is the difference between the costs associated with acquiring and managing a property and the financial return you receive from that property. There’s two ways to understand yield:

1. Gross yield

   Rent per week x 52 (weeks in a year)

   Divided by purchase price

   Multiplied by 100 to get a percentage figure

   That’s your gross yield.
   
   

2. Net yield
   What does this property cost you after tax? After all running costs are paid, what’s left?
   
   Tally up property fees and expenses in a year

   Rent per week x 52 (weeks in a year)

   Deduct the fees/expenses from the rent amount

   Divided by purchase price

   Multiplied by 100 to get a percentage figure
   That’s your net yield.

#5. Location

This is usually the first thing on people's minds, but it should come in conjunction with all points listed here.

Location will of course play into property performance, but it’s not the only fundamental to consider. When choosing a location assess proximity to major city or regional centres, access to amenities such as shops and supermarkets, state of the surrounding roads, access to transport, access to health services and education, the look and feel of the street and surrounding streets, and any plans for development in the area.

#6. Name of person or entity on title

Chat with your accountant on this one - express your goals long term with them and chat through what the tax implications are. You might be buying as an individual with the title in your name, joint with a friend or family member, a company, a trust, or a self managed super fund (SMSF). The one you choose will depend on your answer to point #1 - your strategy (see now why we started with that?).

#7. Loan to value ratio (LVR)

Generally speaking the lower the loan to value ratio (LVR) the better. It’s a comparative look at the price point of the property against how much you’d need to borrow in order to buy that property.

Loan to value ratio (LVR) is determined as follows:

The amount you plan to borrow to buy a property (or your current loan amount)

Divided by purchase price

Multiplied by 100 to get a percentage figure.

That’s your LVR.

Most lenders see an LVR higher than 80% as a risk, in which case you’ll often be required to pay lenders mortgage insurance (LMI) to insure the lender.

#8. Type of property

Now to select the type of property that suits your strategy. Here are some options potentially available to you:

• Houses

• Units

• Apartments

• Townhouses

• Duplexes

• Land

Of course these property types all have their own nuances - some come with greater costs because of a bigger land portion affecting things like rates, others may have strata costs associated, they’ll all be affected by the surrounding market in regards to supply/demand and vacancy rates - really do your research on how these property types are performing.

If you need to get further training and info under your belt listen to my millennial property, or sign up for a clarity call with John to walk through these 8 points in regards to your own portfolio. Simply click ‘Get Help’ and reach out.

Also check out John’s buyer’s agency service for investors, Envisage Property! This is a buyers agency specialising in purchasing investment properties, creating a thorough strategy that takes into account clients long term wealth plans.