Among the famous 7 Habits of Highly Effective People detailed by author Steven Covey, there’s one that’s particularly applicable to property investors:
Habit 2: Begin with the end in mind.
In my experience, there’s no substitute for knowing where you want to be before you take the first step. It allows you to adequately prepare and venture forth fearlessly.
It’s often the crucial difference between building a rolled-gold investment portfolio, or being stuck with an unsaleable lemon when it comes time to exit.
Hard learned lesson
My position on ‘buying with the end in mind’ is best demonstrated by an expensive error that dealt me a world of experience.
About 15 years ago, I bought a student apartment and wholeheartedly thought I’d jagged a great deal.
At the time, I was on a good income, had decent access to finance and was full of confidence in my financial knowledge.
So, I jumped in with little thought as to how the investment would work within my portfolio and what long-term goals it would satisfy. I simply knew I wanted to secure something, and the sales brochure made it look like a great idea.
I paid $185,000 for that South Yarra unit and justified that the $240-per-week rent would service the debt while I waited for the inevitable capital growth.
So – how did that play out?
Well, 15 years on and I still get $240 per week, but because expenses and body corporate fees are so high, I only net about $8000 per year.
But worst of all, it’s almost ‘unsellable’ because the demand for this investor-specific asset has pretty much dried up in the face of fairly high supply.
In fact, I’d be lucky to secure much over $100,000 if I listed on the open market.
So, because of the asset selection, there’s no exit strategy available to me. I can’t refinance it and nobody wants to buy it.
What a dud.
If there’s a silver lining in this experience, it’s that my expensive lesson is a cautionary tale everyone can learn from.
My primary error was not adequately thinking about the unit’s fundamentals, its purpose in my portfolio and the long-term implications of owning it BEFORE I signed on the dotted line.
In this instance, I should have sought professional advice and completed more thorough research.
I would have realised apartments like these are notoriously hard to sell compared to houses. Also, while the cash flow looked enticing, my exit strategy was to wait for capital growth and enjoy the benefits in a cycle or two. As such, this holding was a bad choice.
But you really need to identify those things at the beginning of your decision making, not find out when it’s too late.
Now, I’m not saying apartments mightn’t be the right choice for some. If you were buying a unit in a lifestyle location with plans to retire and live in it, then fine. You aren’t worried about capital gains, and the strong yield will keep the costs serviced. Just so long as you’re aware of what you want to achieve early and are prepared to ride out the journey.
The exit strategy needs to be the first thing you decide on before acquiring the asset.
In my mind, asset selection and your approach to finance should be about fundamental understandings.
Is it a good holding, in a great location with potential for capital growth and liquid demand for eventual sale or refinance? Can we maximise the tax benefits and wait for the cycle to do its thing over the next ten or so years? Does your strategy indicate you should finance via Principle + Interest, or would an Interest Only loan work? At what point are you likely to ‘exit’ the asset and pay down the loan?
These are all queries to help you can proceed in the correct direction from the get-go.
So, do the right thing by your future self and make sure you start with the end in mind by leaning on the experience of an advisor who can help select the right properties for you.
Because there’s nothing quite as satisfying as a gracious exit.
Richard Crabb, Aspire Property Advisor Network, 11 December 2019