The key to becoming a professional property investor

I thought that I would share this article with you from a property investment company in Australia called Investors Direct. While there are some slightly different regulations regarding taxation on investment property the bulk of this article still applies to property investment in the UK. What is interesting about the Australian market is that generally yields are very low (usually 3-4% while interest rates are 6-7%) and yet many people still actively invest in property because of potential capital growth. My name is Nils Oman. I came to Australia from Sweden in 1980. In 1984 I settled in Melbourne and worked in the telecommunications industry. At that time I had a young family and was trying to figure out how I could best provide for my wife and my two sons. For years I went to better-yourself seminars. I read the few books I could find about real estate. Most were from the US. The only Australian author in those days was Alan Falkson. In 1991 I bought my first investment property in the Melbourne suburb of Kew. This was just at the start of the long lull in real estate from 1991-1996. The tenant and I paid $800/mth each towards the mortgage. That was tough. In 1998 I bought my second property and today I have over 20 properties.

Most properties are in Melbourne but I also have some of my investments in Queensland. I have also invested in regional areas and at one time had a dozen properties in the country. When I first started out my strategy was to Buy & Hold. But then I started to get a bit more creative and did some renovations. Once my equity had built up a bit I ventured into development. Today I do mostly development. When I started out investing in property I entered unknown territory. Many of us prepare for the big step by reading lots of books, going to seminars, reading magazines etc. We learnt quite a lot about property but we have not yet actually bought a property. It is totally different when you practically apply all the theories you have read about.

Once I bought my first property I was in new, unchartered waters. I was right out of my comfort zone and this uncertainty brought up many fears in me:
Will I get the finance?
Will there be a tenant for my property?
How do I find a good managing agent?
Will the maintenance be expensive for me? Etc…

There were so many countless little doubts that entered my mind. But I think the biggest and most sinister fear I have had to overcome in order to take my investing to the next level was my Fear of Debt. There was always a niggling thought at the back of my mind saying: can you actually afford this? What happens if you get laid off at work? What if there is a downturn in the economy? What if this, what if that, what if what if what if…. What I realised was that this fear is often subconscious so you don't actually notice it. But your subconscious mind controls your actions. The result is that your subconscious mind is trying to get you away from this threat. The mind tries behaviours like: dragging your feet when looking for a property, diverting your attention to other less threatening activities and making you easily distracted from the task at hand. Many times during 1991-96 I doubted the wisdom in owning property. I seriously considered selling my Kew investment to get away from the negative gearing. But I persisted. Apart from getting back to square one again if I sold, I would also feel that I had failed if I sold. So I held on. This property has now trebled in value. The negative gearing was tough at the time but pales into insignificance when I do the numbers on this property today. During this period I often found myself subconsciously avoiding reading property articles to avoid thinking constructively about the next step. It is only if you can observe yourself and notice that this is happening then you can start taking control of the situation. So how do you control your subconscious mind?

Well, it is notoriously difficult to communicate with the subconscious. But it is not impossible. As so often, education is a very good start. If you try to understand how the financing actually works then you can put your mind to ease a bit. Education helps to overcome the fear of the unknown. In 1996 I started to engage myself in property again and forced myself to think positively about it. I read more books and I found a couple of investors to talk to. This helped me to change my attitude and to program my subconscious mind by setting goals and visualising them. You also have to remind yourself that you are actually buying an appreciating asset. You must also remember that you are not alone in your quest for financial independence. The tenant and the taxman are helping you. One of the great advantages of residential property is that there is always a tenant waiting to rent your property. If the property is slow to rent you can lower the rent $5-$10/wk and suddenly it is leased. The taxman helps you by lowering your tax if you are negatively geared. At the end of the day – if you can make up the shortfall between the interest payments and the rent then you are OK. The most critical period in your investing life is when you just start out. You don't have a lot of resources behind you at this stage. You rely heavily on your income to make up any shortfall between interest payments and the rent. As your first property grows in value, your equity position gets better. But that does not help your cash flow initially. Once the equity has grown enough you can refinance the property (increasing the loan and getting the extra out as cash). This increases the interest payments but by now you also probably have higher rent payments to compensate. You can use the cash you have just released as a buffer for your cash flow or to buy another property (if you don't need the buffer). This is called equity financing. It might appear frightening to borrow more money so you can pay the interest using this money. But this is the technique most investors use to finance their negative gearing and to buy more properties. I use a LOC (line of credit) to finance my monthly negative gearing. It also provides my 20% equity when I buy a new property. I top up the LOC via refinancing when I need to. I must admit that the last couple of years I have been a bit nervous about my cash flow since I am a full-time investor and don't have any other income. The market has been flat and my portfolio is negatively geared so every month I have used up a bit of this equity I have. But now the market here in Melbourne has started to move again so the reserve I had has been sufficient. I think the big leap of faith is when you realise that you can finance debt with debt and you dare to actually use this strategy. If your rental return is 4% and the property increases by 10% per year then your total return is 14%. You pay roughly 7% of this to the bank. The remaining 7% grows your asset. This means that you must take out 3% per year of the 10% growth to pay the bank. The other way to do this is to refinance a property every once in a while, use the cash released to pay your shortfall cash wise on all your properties and then do another refinance before you run out of cash. This might sound a bit hairy and risky, but if your properties are reasonably well chosen you can be fairly sure that this process can be used. Your broker will be able to do the refinancing for you and get you the necessary cash. The fallback position (if you are in a period with little growth) is that you have 20% equity in the property (always leave 20% equity in the property if you can) so if all else fails you can sell the property and get your 20% out again. This is not recommended but it will save your skin.

Active investors have, as a rule, always negatively geared portfolios. All serious investors I know that hold a number of properties use this technique. It works because your assets are growing consistently. I have refinanced some of my properties several times to release more cash from them. The beauty is that the properties are still mine and they still go up in value! Everyone knows that there is a difference between theory and practice. The fear of debt can stop many investors from moving from theory to practice. However it is only once you have experienced this that you truly conquer your fear of debt, can take control of your emotions and have the confidence to take your investing to the next level!

Act Now and Reap The Benefits!