Don't follow your gut: Lesser known secrets of successful property investors
More than just calculating yield and returns, here's a list of useful tips if you ever decide to jump into the property investment game.
You think you probably know it all by now: check the gross rental yield, calculate the ROI (return on investment), and never pay for a property investment course in a dodgy hotel seminar ever again.
But do you really?
We’ve heard the usual rules about calculating yield and returns, but successful investors have the secret ingredient that goes beyond that: They have acumen and experience.
We asked some veterans about property investing's lesser known secrets and they came back with tips to share.
1. FOLLOW A PLAN, NOT YOUR GUT
Successful property investors go in with a concrete plan. We don’t mean vague ideas about what they’ll do with the property when they grow old – these people have quantifiable targets that their property asset has to meet. For example, generate annualised returns of 4 per cent over the next 20 years as a contribution to your retirement fund.
Their plans include specific details such as:
- When to sell (this is usually based on quantifiable conditions such as if vacancies stretch to a certain number of months, or if the property value falls or rises to a given sum).
- When to refinance.
- When to renovate, and how much to spend each time.
- Multiple exit strategies.
Having a fixed plan – with quantifiable targets – takes emotion out of the picture. If the property becomes a liability later, for example, an investor with a plan will find it psychologically easier to sell.
2. BUY WITH A SPECIFIC TYPE OF TENANT IN MIND
Successful property investors will case the area, and buy only if they can clearly visualise what sort of tenant would want to move in. This is more important than vague notions like “there’s a coffee shop nearby”.
Consider the following situations:
- If a property is near a university, foreign students unable to find a dorm will be a source of constant demand, even if the area has limited shops or nightlife.
- If the property is high end, it will mainly cater to expatriates with big housing allowances. That could mean vacancies if the overall economy turns bad, and big companies lower said allowances.
- Properties near high-end restaurants may not mean anything to middle or lower income tenants, who need a cheaper form of dining.
This sort of acumen takes time to develop. But for new investors, a good practice is to ask yourself who would want to live in the area. If you can’t think of a clear answer, you should either consult a property agent, who can analyse the area for you, or simply rethink your decision to invest.
Some of the most successful property investors focus on a single demographic: For example, students or expatriate workers at a certain income level, and invest specifically with this group in mind.
3. LOOK AT THE BUSINESSES MOVING IN
A good way to tell if a neighbourhood is picking up is to look at the businesses moving in. This is best done over specific time frame – look at brand names moving in over a period of five years.
But even if you don’t have that information, you can look for the following:
- A proliferation of fast-food chains moving in nearby. For example, chains like McDonald’s, Burger King, Kentucky Friend Chicken don’t usually move into an area until a certain level of foot traffic is reached. For residential properties, their presence could indicate that the area is becoming a hub of some sort.
- Gentrification. The influx of fancy restaurants or avant garde boutiques setting up in the area. This was what happened to Tiong Bahru, and helped raised prices in the area. It’s also currently happening along East Coast Road near the Red House.
- Chain retailers replacing smaller entities in the nearby mall. For example, by 2014, Tampines had become so well developed that international chain Uniqlo chose to open their first store there instead of more prime location like Orchard Road.
Remember: Businesses conduct extensive research on locations before moving in. A successful property investor will consider the insight these companies have.
4. MINIMISE THE NUMBER OF FAMILY-AS-CO-OWNERS
If you need to involve too many family members as co-owners, perhaps its best not to invest at all. Remember that they all have a say, be it issues such as who to rent the unit out to, or whether to sell the unit.
There are many situations where some family members disagree with a profitable sale or perhaps move in and decide to use it as a residence (thus eliminating any rental income).
If these are just your business partners, you can at least resort to legal action. But it gets messy when the person involved is, say, your father-in-law or an aunt who helped raised you. You can live with them and love them, but sometimes you just can’t invest with them.
5. FOCUS ON BUYING LOW, NOT SELLING HIGH
When you buy low, you ensure that you have more holding power. That means you won’t be forced to sell during an emergency. On top of that, you also borrow less and hence, pay less interest (assuming you made the effort to find the cheapest loan).
Do consult a mortgage broker. Even if the property doesn’t sell for as much you hope, you will at least have your finances in better shape.
You could also be facing better odds: if the properties in the area have been selling at S$1,800 PSF for the past 15 years, and you bought at S$1,780 PSF due to a dip in the market, all it takes is for you to profit is for things to go back to normal.
Between buying low and being forced to sell low, and buying high and being forced to sell high, the former is the safer course. That’s why successful property investors are more focused on looking for discounts, rather than speculating on appreciation.
This article first appeared on 99.co.