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We all agree that property investment is a long-term game.
Many of our research papers focus on how to enter the game, especially the indicators to watch for, but what is needed to maintain a healthy portfolio to reach your long-term growth goals whilst creating a sustainable passive income?
After analysing InvestorKit clients and the team’s personal trials and tribulations, we’ve uncovered 3 tangible tips to adopt to ensure your property portfolio continues to develop nicely.
Tip 1: Repairs and maintenance – Putting the 1% into perspective for 99% better clarity
Repairs and maintenance (R&M) have been given a negative image – Many see it as a dark cloud hovering over their investment.
Is R&M that bad? No.
Is it something to be losing sleep over? Certainly not.
If you have difficulty making R&M decisions often, our 1% theory might help.
It all starts with asking yourself a simple question: What if I gave away 1% of growth every year? Would I still be comfortable with my portfolio planning?
Go to your portfolio planner, and reduce 1% from your expected annual growth rate. If you find that with 1% deducted, you can still achieve your overall investment goal. Great! Now you can have peace of mind spending 1% of your property’s value on R&M each year. That is $5k/y for a $500k property, which is more than enough and, by the way, unlikely to happen.
If you’re not comfortable with 1%, try and reduce the 1% to 0.5%. It’s just important to remember that an annual budget for R&M is not only necessary, but also good for you: A well-maintained property makes tenants happier and probably stay longer, with the knock-on being you save time, money and effort on finding a new tenant; If you have to look for new tenants, having a nicely-maintained property means you can ask for a higher price and have more cash flow. These are only a few of the benefits R&M brings to your investment portfolio.
You may have been lucky with one of your investments receiving no R&M requests, or you may have had a bad experience having to spend thousands on one repair. It’s the recurring thought that the one experience is going to be the same forever and for all that negatively impact you. That’s why the 1% theory can make things much easier and give you so much peace of mind around R&M decisions when keeping an investment property for the longer term.
Tip 2: Buffers – Stay afloat whilst expanding your horizons
So, you want to buy your next property, but are you ready? Every purchase decision has some risk associated with it, and that’s okay. Learning to acknowledge the risk and adopt strategies to mitigate risks helps bring peace of mind to investors.
When it comes to buying your next property, our general rule is that if you’re an aggressive investor, we recommend having a 6-month buffer and if you’re a more conservative investor, we recommend having a 9-12-month buffer.The ‘buffers’ refer to a sum of both loan repayments and rental expenses.
Now let’s use Michelle’s investment journey as an example.
We assume that Michelle bought a house for $600,000 in Happy Valley(Greater Adelaide). The below table shows how much buffer she should prepare before purchasing her next property in 3 scenarios.
– If she’s an aggressive investor, she could buy her next property when she has $21,187 ready as a buffer;
– If she’s relatively conservative, she would need a $28,765 buffer before buying her next property;
– and if she wanted to play safer, she would need $42,373 in her bank account to be confident in buying the next property.
These buffers help to give investors a layer of security for the property in case of any unexpected R&M needs, vacancies, etc.
You probably think that it is a lot of money, and for many, it is.However, you don’t have to rely on your hard-earned savings. There are alternate ways of generating these buffers, for example, unlocking equity from your existing investments by refinancing.
Without the buffer, you would probably have to find the ‘perfect’ property to meet strict cash flow criteria and, as a result, have much limited options; but by having buffers, you’ll be able to shift your mindset into seeking an opportunity that would benefit your portfolio in the long term, not just right now.
Tip 3: Annual review – Keep your finger on the pulse, but no need to press too hard
When it comes to investing, it’s essential to keep your finger on the pulse. It’s great to have a bank valuation of your investments every 12 months to track and see the annual changes in your properties.
This allows you to review properties and see if any equity can be taken out for a potential subsequent property or to improve and create buffers for existing properties.
The annual review also gives you an opportunity to check comparable sales and comparable rents to ensure that your rents are in line with the market and make informed decisions around rent rises.
Some investors may be pushing it too hard by monitoring their property value every month and trying to respond to every property market news, fearing that things would go wrong if they do not do so.
That is not necessary, as the property market is quite illiquid. Checking on your properties too often is not only time-consuming but, in many cases, misleading – It’s the nature of media to exaggerate bad news and make you panic. Ultimately, it would add to the ‘property is too hard’ mindset.
Instead, receiving annual information about your investments helps you to look at your investments more holistically, eliminating any extra potential stress.
The overall lesson here is not to sweat the small stuff.
This blog is inspired by one of our latest podcasts: 4 Tips To Improve Your “Holding” Journey With Property Investing. As you go on with your investment journey, remember that goals are long-term. Being aware of these tips and adopting the strategies enables you to have the right mindset in relation to holding your assets.
To learn more tips and tricks within property investment, check out our blogs and whitepapers. To begin your property investment journey with InvestorKit, request your FREE 45-minute no-obligation consultation today!