It’s no secret that investing in property is one of the best ways to generate wealth both in the short term and long term, but what many new investors fail to realise is that only a handful will grow their investment portfolio beyond one property and even fewer will generate “real” wealth by climbing to the top of the residential property ladder.
When investing, it’s important to keep your expectations in check. As a new investor, you can’t expect the market to do all of the heavy lifting for you. Selecting the right investment property will be critical, but an even more critical component will be your property manager. This will play a big role in maximising your return on investment.
To assist you with making the right investment decisions, the team at Bond Property Management have created a guide to help you maximise your return on investment.
The following article will discuss 3 of the most common mistakes property investors make and a few tips on how you can overcome the pitfalls and succeed as a real estate investor.
Understanding Return On Investment (ROI) in Property
Before we dive right into practical advice on how to maximise your return on investment, it’s important to clarify what ROI is in residential property investing.
In a nutshell, ROI is essentially how much profit you make on an investment property compared to the money that you have invested in the property plus the expenditures the property requires such as management and maintenance fees.
The two most common ways to calculate ROI are capitalisation rate and cash on cash return.
Considered to be a more valuable number than gross rental yield, this straightforward method involves calculating the rate of return on an investment property. Capitalisation rate (or cap rate for short) involves dividing the net operating income (NOI) by the property sale price or current market value (CMV). A healthy cap rate is between 8-12% and can also be used to measure the risk associated with buying an investment property.
Cash On Cash Return
A more comprehensive measure of return on investment, the cash on cash return (CoC for short) is calculated by dividing the before-tax cash flow by the total amount of cash invested in the property. This metric takes into account the method of financing of the property such as mortgage vs. cash. Investors should aim for a value of 8% or higher.
Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk.Armstrong Williams, entrepreneur
Now that you have a good understanding of how to calculate ROI, let’s get stuck into 3 of the most common mistakes property investors make and how to avoid these mistakes:
1. Supposing is good, but finding out is better
When investing in real estate it is imperative that investors base their decision on analytical research rather than emotions. Deciding with emotion can quickly lead to investors over-capitalising as they not only lose their negotiating power but they also tend to leave the important questions unanswered.
Some of these questions involve:
- Will this location attract quality tenants?
- What are the average rental prices for properties similar to yours?
- Will the property provide the gains and returns you require?
- What is the capitalisation rate of the property?
- What is the annual growth rate of the suburb? Are property prices stable?
2. Beyond the numbers
Now that you have done your homework you can decide whether or not to commit, right? Wrong. Being thorough is key when investing, and here are some additional questions to take into account:
- Why is the vendor selling? Are they in a rush to sell? If so, you can benefit by putting a lower offer on the table.
- Is the house structurally sound? Have you completed all the necessary inspections? Do you see any signs of pest infestations, like termites? Did you know that paying for an inspection will not only give you peace of mind but it will also be tax deductible?
- Aim to inspect the property at least twice during different times of the day to ensure that you get an accurate feel for the property. Keep an eye out for noise levels, natural light, indoor temperatures and any inconsistencies.
- Will the property be appealing to the tenants you have in mind? Is the floor plan practical? How can you reduce property maintenance?
- Have you been made aware of the full history of the property? Think encumbrances, ongoing disputes, flooding, deaths etc.
3. Trying to save by self-managing
Many investors have tried to increase their profits by self-managing their portfolio but very few succeed. Managing your own portfolio can quickly turn into a headache, especially if you have more than one property.
You’ll have to dedicate your time and money to finding and qualifying suitable tenants, educating yourself about property law and renting in your state, conduct regular inspections, collecting the rent, represent yourself at tribunals should a dispute arise and be on call to deal with maintenance issues.
Not the best use of your time now, is it?
Engaging a professional property manager to handle all of your property needs will not only ensure the best outcome for your investment property, but it will free up your most valuable asset – time.
But that’s not all, the team at Bond Property Management can help you save on costs by reviewing your annual insurance premiums and conducting rent reviews which in turn will save you money in the long run.
If you’re an investor who requires proactive and professional management to protect your valuable asset then look no further. At Bond Property Management we understand the need for responsive, stable and transparent property managers in the South-East Queensland region including Brisbane, Sunshine Coast, Gold Coast and Ipswich.
Our team will work hard to maximise your property returns whilst ensuring that you and your tenants are well looked after. Get in touch today for a FREE consultation.