I’ve said it before: it’s always been difficult to buy your first property. No matter whether it was the 1960s, 1990s or now, scrimping and saving for that deposit takes discipline and dedication. Now I admit that with property prices in Sydney skyrocketing, saving the necessary funds to buy a property has become harder still. But let me be frank: you’ll probably need $100,000 to buy an investment grade property today.
What do you think about that statement? How you get those funds is a topic for another day… What I want to talk about it why you need six figures behind you to have the best chance of becoming a successful investor.
Cheap won’t get you rich
Here’s the thing: some investors think that buying cheap properties will make them rich over the long-term.
Why is that, you ask? Cheap properties will always remain that way (relatively) because they are inferior products. They’re the type of properties that appeal to few potential buyers. And that means that their prices remain subdued because there isn’t the strong demand to drive prices up.
It’s the simple supply and demand equation.
Investment grade properties, on the other hand, cost more and will always do so. They’re the opposite of cheap properties and will always be the beneficiary of more demand than supply, which will result in strong capital growth over the years.
What do I mean by investment grade property?
Well I mean that they’re properties that:
- Appeal to a wide range of affluent owner occupiers;
- Are in the right location;
- Have street appeal as well as a favourable aspect or good views;
- Offer security as well as off-street car parking;
- Have the potential to add value through renovations;
- And have a high land to asset ratio.
Let’s face it: with a list of attributes like that it’s no surprise that investment grade properties will always be more expensive.
And that is why you should buy them.
Let me be clear: that $100,000 will help you buy the right type of property but it can also help you hold it for the long-term, too.
You see, you need cash flow (and that means cash!) to hold properties for the length of time that it takes for the power of compounding to work its magic.
I’ve seen far too many investors get in over their financial heads by over-leveraging. Then when something bad happens – like job loss or the GFC – they have no choice but to sell at the worst possible time. In other words, they sell because they have too and they generally lose money because of it. If they had a cash buffer behind them, though, they would’ve had a better chance of riding out any short- or medium-term issues. You always want to sell at a time of your choosing – and preferably one that’s many years (or decades!) after you invested in the property to start off with.
Investment grade or bust
The lesson from all of this is that if you don’t buy an investment grade property then it’s likely to go horribly wrong at some stage in the future.
Don’t believe me?
If you don’t buy an investment grade property you’ll get the same result the majority of investors get, which is not a pretty sight. Did you know that 50 percent sell up in the first five years? And of those who stay in real estate, 92 percent never get past their second property.
They’re sobering statistics aren’t they?
It might sound strange coming from me, but it’s usually better to do nothing than to buy a secondary property. Wait until you can afford to buy a superior property and don’t believe the “get rich quick” schemes. In fact, if it sounds too good to be true it is. At the end of the day, successful property investment is all about getting rich slow.
So, be a property turtle, not a hare, and you’ll be ahead of the pack in no time.