By Steve Waters
I believe one of the great misnomers in property investment is the idea real estate is a passive vehicle that doesn’t require the owner to raise a finger in effort beyond lifting a pen and signing the purchase contract.
Set-and-forget is a view that’s long been sold as the secret to riches through bricks and mortar. Well, I’m here to burst your bubble because in my experience, lazy investors eventually lose money.
Why the myth sells
It’s easy to see why there’s so much appeal for the fiction of set-and-forget investment.
What could be easier? You purchase a holding that’s effectively paying for itself. You then sit back and wait, feet up with a good book or podcast and let a market cycle or two do their work until it comes time to offload the portfolio for a massive profit. It’s easy money because your real estate works to build wealth even while you sleep.
The problem, however, lies in one simple truth. Property markets and the influencers that drive them are dynamic and if you let go of the wheel, you’re bound to crash the vehicle.
What could possibly go wrong
One of the most common ways we see lazy investors lose out relates to cash flow drying up.
Cash flow must be monitored. It’s a dangerous path to tread if you just buy the property, collect the rent and pay the mortgage.
Your investment’s cash flow is dependent on many elements and high among them is maintaining market rent. Keeping up to date with the rental market takes effort and if you fail to stay well informed, you will lose money.
If your holding is in a sector and/or area dominated by rising vacancies and falling tenant demand, for example, you might find yourself with a vacant property and little idea of why. It’s tough to jag a tenant when everyone else is pricing more competitively.
Remember this too – it takes a long time to catch up on a week’s lost rent, even if you do somehow achieve a premium.
If you eventually get $350 a week when everyone else is getting $330, but you sat vacant for just two-weeks longer to find that tenant, it will take 17-and-a-half weeks for that $20 premium to make up the difference. That’s about four months of constant tenancy. With rentals, a bird in the hand is worth about 10 in the bush.
Conversely, if you fail to keep up with appropriate rent rises, you’ll be locked out of maximising your return – particularly if your tenant is on a long lease. Start tracking local rents at least two-to-three months before the lease expires.
Keep your interest
I say it time and again – property investment is a finance game.
When interest rates move (and they inevitably will) you need to be right across your current arrangements with the lender to ensure you’re maximising your position.
Those who rest on their laurels and don’t check on competitive finance terms are missing the chance to take advantage. Get onto your financier or broker and request a reduction because if you don’t ask, you don’t get. In todays finance environment, it may be a different example. Something as simple as monitoring when an interest only 5 year term expires and rolls over to Principal and Interest may effectively add 75% more to your mortgage repayments.
Know your tenants
It’s imperative to keep an eye on the macro economy of your investment suburb. See what sorts of tenants are driving demand the hardest and cater to their requirements.
Are there plans to establish a new university nearby? Maybe you need to increase the number of bedrooms and bathrooms in your holding.
Is your tenant demographic changing from blue-collar to white-collar workers? Perhaps now is the time to refresh your home and attract a high-income earner.
Is a major employer bringing more transient workers to town? Consider furnishing your rental for top dollar.
Different property, new challenge
Some consider units to be more set-and-forget than houses, but I think both need attention. It’s just the challenges are different.
While units may seem less taxing in terms of maintenance, there’s the machinations of strata ownership to deal with. If you’re not a member of your body corporate or strata committee, if you’re not reading the minutes from the AGM and if you’re not voting on resolutions, you’re foolish.
98% of investors don’t get involved and as the old saying goes, decisions aren’t made by the smartest people, they’re just made by those who turn up.
In a body corporate, motions will be passed and these could be improvements or repairs set to cost you thousands, so have your say.
Be a business owner
The key to success is treating your multi-property portfolio like a collection of small businesses.
Imagine if business owners created a cash flow and then said, “That’s me! I’m done! Now to just sit back and wait for this business to grow and flourish all by itself!” It’d be a sure path to a financial crisis. Focus on the profit and loss rather than the balance sheet. What this means is focus on the day to day cash flow of your portfolio rather than the day to day change in the value of your portfolio. The increase in value to the portfolio will come if you’ve got the asset selection right, however, if you’re not in touch with the cash flow, all the equity in the world will mean nothing if you can’t service the debt.
If you don’t constantly work on your portfolio, you’ll eventually leave money on the table or see equity and cash flow ripped from under you.
If you’re a hopelessly lazy investor, then I’ll be brutal – property investing isn’t for you so go buy shares.
If you need to get some motivation, I suggest periodically remembering how much money you’ve got on the line. That should instantly awaken you to the importance of being involved in your holdings because a million dollars’ worth of debt is serious.
Finally, have someone outside of your circle review your situation. Even I have my business partner regularly run a fine-toothed comb over my portfolio, because it’s smart to be active.
Remember, speculation and inactiveness is the mother of all evil when leveraging debt!!