Hello
I am new to this forum and thought it might be a good exercise to write down my goals/plans for the next 20 years with regards to property investing. It will be fascinating to look at this in future years to see where my thoughts were at at this current moment, and my apologies in advance if this is a bit self-indulgent. I am basically writing what comes into my head at this particular moment in time, however this plan has become more and more solid in my own mind over the last few months.
I am new to property investing and have only started researching in depth for the last twelve months or so. I have always been more interested in shares, but the economics of property as an asset class just seem irresistible to me - it seems more and more like the perfect investment for Australia the more I look into it.
Where I am at currently
I am currently a (youngish) accountant with a salary of 60k a year. My salary will likely improve to maybe 80k over the next few years and maybe 100k a few years that. My surplus income now is about 20k a year (I have a housemate who helps with the costs).
Why Property?
The main reasons I see property as a great investment are:
- growing demand for the asset (population growth)
- fixed supply in certain areas (building restrictions in capital city suburbs)
- ability to leverage high amounts (80%+ of the value of the asset, compared with ~60% for shares) without the possibility of a margin call (as with shares). More $ value of assets working for you; a constant debt amount with the asset being pushed up by the forces of inflation over time.
- tax effective (no tax on unrealised gains and potential for negative gearing and on-paper losses to reduce tax)
- a floor under property prices as 70% of the market are owner-occupiers - unlikely to sell if there is a downturn in prices and therefore less likelihood of a property crash
- ability to forecast the future with a fair degree of accuracy in terms of supply and demand. Supply side being NIMBYism, Government inertia (passing the buck from Federal to State to Council - and then back again) and wealthy people protecting their own interests. Demand side being ability to forecast population growth (in terms of natural increase and net overseas migration) with a fair degree of accuracy. Ability to spot slow moving trends such as migration.
My Strategy
I plan to buy assets that:
- are residential property
- have owner occupier appeal
- are in the Big 4 capital cities of Australia
- are in suburbs with an easy commute to the CBD
- are in suburbs with growing median incomes (above two points will likely confine the majority of my purchases to units rather than houses)
- will allow me to add value through cosmetic renovations to increase rent and buy under market value. I will lean towards established properties over off the plan properties.
I plan to outsource a lot of the work such as selecting assets and negotiating with sellers, banks etc. I plan to use a buyer's agent with a good track record who has access to off-market purchases through relationships with real estate agents etc. I see a buyer's agent as a good form of insurance (especially at this early stage of my property investing career) because I do not consider myself to be a good negotiator and I don't particularly enjoy looking at houses/doing inspections. Asset selection will be absolutely crucial to my strategy because I plan to hold them for the very long term, and the difference between say a 5% growth rate and a 7% growth rate over decades will be HUGE.
Risks
The main risks I see (and ways to mitigate them) are:
- interest rate risk - I plan to lock in interest rates for as long as possible to mitigate the risk of interest rate rises (5-10 year fixed - depending on interest rates). If I buy multiple properties I will try and stagger the maturity dates of each fixed interest mortgage loan so there are no shocks to my budget
- inertia - I probably overanalyse things, so a risk will be not doing anything at all. I plan to use a buyer's agent to use as a catalyst for me to purchase/help motivate me.
- debt - I have insurance in place in case I lose my job, have unexpected shocks etc., but it will still be a big risk being millions of $s in debt potentially (over the next few decades) and being on a single income. I am happy to take this calculated risk in order to have a potentially larger reward.
- decision-making - I have a tendency to incorrectly project short-term past results well into the future (this is probably innate to humans). As a result I have sold assets at the wrong times because they briefly went down in price (shares). The property purchase should mitigate the risk in itself because I will not be able to see prices daily and the huge transaction costs will be likely to dissuade me from making any rash decisions.
- Lack of tenants / potential purchasers - I plan to mitigate this risk by buying assets that appeal to most of the public (i.e. median price range for the area, capital cities where there is a deep market of buyers)
- Selecting a poor asset - I plan to use a buyer's agent with a good track record to avoid pitfalls such as buying overvalued property, buying in a poor area etc. - this could potentially set me back years so I am happy to pay up now for the advice and service of a quality BA.
Expected Growth Rates
I believe the next few decades will be very different from the last few with property investing. Financial deregulation, increase in household debt and lowering of interest rates have pushed up all property assets markedly in this time. I don't see this continuing, therefore selecting quality assets will be crucial.
I see a quality asset as being located in capital cities with good proximity to the CBD. I plan to buy in the inner-middle ring suburbs of the Big 4 capital cities because:
- I expect the majority of the current 400k annual population growth to migrate to the capital cities. I believe people are attracted to, and live, where the jobs are. I don't believe, after looking at the data, that the jobs go to where the people are (and people can telecommute). There is pretty strong evidence that jobs growth is strongest in the CBDs of the capital cities, and I believe that around these areas there will be strong wage growth for decades, given the knowledge based economy that we currently have in Australia.
- I believe there will be continuing supply shortages of property in inner-middle ring suburbs due to council restrictions, NIMBYism.
I am projecting a capital growth rate of around 6% nominal growth going forward, on average. I expect interest rates, inflation, wages and GDP growth to stay low for the foreseeable future which will limit the capital growth I can expect. However, this may allow me to purchase more properties as my ability to service the debt will be higher.
My plan is to purchase assets as interest only, wait for the properties to increase in value and use the equity to fund another property purchase. I am hoping to buy a property every two years but this is a very rough estimate. As I plan to buy for mainly capital growth, the assets I purchase will likely inhibit my debt servicing ability and I will not be able to buy assets all that frequently (compared to a "purchasing for yield" strategy). I am happy enough with this because I plan to hold all my assets for the next 50+ years, so I will likely not see the benefits for a few years.
Anyway that is all I can think of for now. I am meeting with two buyer's agents next week, I will likely choose one to work with me to purchase my first investment property (the first of many hopefully!).
Thanks to anyone who has read this wall of text and I would love to hear any feedback/ways to improve my strategy.
Cheers
edit: I also want to add, more for my future self's benefit than anything else, how lucky and blessed I feel right now that I am in this situation. Good job, living in a first world country, having control over my thoughts and emotions, comfortable in myself - I am truly living an answered prayer!
I am new to this forum and thought it might be a good exercise to write down my goals/plans for the next 20 years with regards to property investing. It will be fascinating to look at this in future years to see where my thoughts were at at this current moment, and my apologies in advance if this is a bit self-indulgent. I am basically writing what comes into my head at this particular moment in time, however this plan has become more and more solid in my own mind over the last few months.
I am new to property investing and have only started researching in depth for the last twelve months or so. I have always been more interested in shares, but the economics of property as an asset class just seem irresistible to me - it seems more and more like the perfect investment for Australia the more I look into it.
Where I am at currently
I am currently a (youngish) accountant with a salary of 60k a year. My salary will likely improve to maybe 80k over the next few years and maybe 100k a few years that. My surplus income now is about 20k a year (I have a housemate who helps with the costs).
Why Property?
The main reasons I see property as a great investment are:
- growing demand for the asset (population growth)
- fixed supply in certain areas (building restrictions in capital city suburbs)
- ability to leverage high amounts (80%+ of the value of the asset, compared with ~60% for shares) without the possibility of a margin call (as with shares). More $ value of assets working for you; a constant debt amount with the asset being pushed up by the forces of inflation over time.
- tax effective (no tax on unrealised gains and potential for negative gearing and on-paper losses to reduce tax)
- a floor under property prices as 70% of the market are owner-occupiers - unlikely to sell if there is a downturn in prices and therefore less likelihood of a property crash
- ability to forecast the future with a fair degree of accuracy in terms of supply and demand. Supply side being NIMBYism, Government inertia (passing the buck from Federal to State to Council - and then back again) and wealthy people protecting their own interests. Demand side being ability to forecast population growth (in terms of natural increase and net overseas migration) with a fair degree of accuracy. Ability to spot slow moving trends such as migration.
My Strategy
I plan to buy assets that:
- are residential property
- have owner occupier appeal
- are in the Big 4 capital cities of Australia
- are in suburbs with an easy commute to the CBD
- are in suburbs with growing median incomes (above two points will likely confine the majority of my purchases to units rather than houses)
- will allow me to add value through cosmetic renovations to increase rent and buy under market value. I will lean towards established properties over off the plan properties.
I plan to outsource a lot of the work such as selecting assets and negotiating with sellers, banks etc. I plan to use a buyer's agent with a good track record who has access to off-market purchases through relationships with real estate agents etc. I see a buyer's agent as a good form of insurance (especially at this early stage of my property investing career) because I do not consider myself to be a good negotiator and I don't particularly enjoy looking at houses/doing inspections. Asset selection will be absolutely crucial to my strategy because I plan to hold them for the very long term, and the difference between say a 5% growth rate and a 7% growth rate over decades will be HUGE.
Risks
The main risks I see (and ways to mitigate them) are:
- interest rate risk - I plan to lock in interest rates for as long as possible to mitigate the risk of interest rate rises (5-10 year fixed - depending on interest rates). If I buy multiple properties I will try and stagger the maturity dates of each fixed interest mortgage loan so there are no shocks to my budget
- inertia - I probably overanalyse things, so a risk will be not doing anything at all. I plan to use a buyer's agent to use as a catalyst for me to purchase/help motivate me.
- debt - I have insurance in place in case I lose my job, have unexpected shocks etc., but it will still be a big risk being millions of $s in debt potentially (over the next few decades) and being on a single income. I am happy to take this calculated risk in order to have a potentially larger reward.
- decision-making - I have a tendency to incorrectly project short-term past results well into the future (this is probably innate to humans). As a result I have sold assets at the wrong times because they briefly went down in price (shares). The property purchase should mitigate the risk in itself because I will not be able to see prices daily and the huge transaction costs will be likely to dissuade me from making any rash decisions.
- Lack of tenants / potential purchasers - I plan to mitigate this risk by buying assets that appeal to most of the public (i.e. median price range for the area, capital cities where there is a deep market of buyers)
- Selecting a poor asset - I plan to use a buyer's agent with a good track record to avoid pitfalls such as buying overvalued property, buying in a poor area etc. - this could potentially set me back years so I am happy to pay up now for the advice and service of a quality BA.
Expected Growth Rates
I believe the next few decades will be very different from the last few with property investing. Financial deregulation, increase in household debt and lowering of interest rates have pushed up all property assets markedly in this time. I don't see this continuing, therefore selecting quality assets will be crucial.
I see a quality asset as being located in capital cities with good proximity to the CBD. I plan to buy in the inner-middle ring suburbs of the Big 4 capital cities because:
- I expect the majority of the current 400k annual population growth to migrate to the capital cities. I believe people are attracted to, and live, where the jobs are. I don't believe, after looking at the data, that the jobs go to where the people are (and people can telecommute). There is pretty strong evidence that jobs growth is strongest in the CBDs of the capital cities, and I believe that around these areas there will be strong wage growth for decades, given the knowledge based economy that we currently have in Australia.
- I believe there will be continuing supply shortages of property in inner-middle ring suburbs due to council restrictions, NIMBYism.
I am projecting a capital growth rate of around 6% nominal growth going forward, on average. I expect interest rates, inflation, wages and GDP growth to stay low for the foreseeable future which will limit the capital growth I can expect. However, this may allow me to purchase more properties as my ability to service the debt will be higher.
My plan is to purchase assets as interest only, wait for the properties to increase in value and use the equity to fund another property purchase. I am hoping to buy a property every two years but this is a very rough estimate. As I plan to buy for mainly capital growth, the assets I purchase will likely inhibit my debt servicing ability and I will not be able to buy assets all that frequently (compared to a "purchasing for yield" strategy). I am happy enough with this because I plan to hold all my assets for the next 50+ years, so I will likely not see the benefits for a few years.
Anyway that is all I can think of for now. I am meeting with two buyer's agents next week, I will likely choose one to work with me to purchase my first investment property (the first of many hopefully!).
Thanks to anyone who has read this wall of text and I would love to hear any feedback/ways to improve my strategy.
Cheers
edit: I also want to add, more for my future self's benefit than anything else, how lucky and blessed I feel right now that I am in this situation. Good job, living in a first world country, having control over my thoughts and emotions, comfortable in myself - I am truly living an answered prayer!