Don’t be fooled by how easy property investment seems, says Owen Holland, national asset manager: properties at Business Partners Limited (BUSINESS/PARTNERS). Compared to other lines of business, the number of transactions may be limited, and the operational burden of owning a building may seem light, but the amounts of money involved is such that one mistake can wipe out all the gain in your portfolio.
The most important principle of property investment is to buy well, says Holland. In other words, buy a good quality property at a good price in the right location with no hidden physical and legal defects.
Again, it seems simpler than it is. To find such a property takes a lot of hard work – hours of pounding the streets to view potential properties and to study the dynamics of an area.
Once you have spotted a building with good potential, hours of due diligence work lies ahead to look for hidden defects, inconsistencies with building plan approvals, problems highlighted in the minutes of body-corporate meetings and the soundness of the structure, sometimes right down to the health of the soil.
And the price? “A good tip is to visit the building, soak up the atmosphere, and picture yourself trying to sell it at the same price to someone else,” says Holland. If it seems difficult, the price is probably too high.
Within this basic framework there are many different strategies to build up a solid property portfolio. It is important to know the advantages and risks involved in each strategy, says Holland.
You may acquire an expensive, single property with the advantage that your attention is focused on only one. The downside, however, is that you are exposed to the vagaries of a single tenant. Buying a number of cheaper properties, on the other hand, helps spread the risk.
Buying a sectional title property is usually more affordable, but then you have to contend with the dynamics and risks involved in a body corporate.
Buying a yet undeveloped property off plan gives you the advantage of realising maximum gain in market value, but only to the extent that the developers and their predictions can be trusted. If you buy in an early phase of a multi-phase development, you might find the value of your property kept low for as long as new properties from the later phases come onto the market.
Buying a property to which you can add value is another strategy, but you run the risks of building mistakes and cost overruns.
Buying during economic hard times might land you a bargain, but you run the risks being hit by a double blow of increased interest rates and vacancies.
Buying property in joint ventures allows you to acquire a share in more substantial properties, but disputes with joint venture partners can turn nasty if the agreement is not well structured. On the other hand, a joint venture with a company like BUSINESS/PARTNERS, which often teams up with local entrepreneurs in property deals, brings substantial technical, legal and financial knowledge to the deal.
Another strategy is buy with the aim to sell immediately, a game usually played only by experienced property entrepreneurs who have built a strong network of agents who bring them good deals.
While it may be a good idea for experienced property players to spread their portfolio by investing in a range of regions, cities and even continents, it is prudent for beginners to buy in areas that they know well, and close enough so that they can easily visit their investment properties.
Whatever your strategy, says Holland, it helps to have a strong network, not only of agents and spotters who could alert you when a property with potential comes onto the market, but also among financiers, joint-venture partners, lawyers, engineers and builders. These professional services are expensive, and good relationship can help keep the costs down.
The main principle is not to skimp on professional expertise. There are so many aspects of a property deal to consider, and so much at stake, that you should never do it on a whim, or on your own.