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Property investment is about the numbers, not the noise

Property investors are at risk right now. Not because of an impending housing market crash or some other general economic disaster that’s completely out of your control. Rather, the risk comes from all the noise and media mayhem surrounding Australia’s residential real estate sector at this particular juncture.

It’s always the same story. Activity starts to increase off the back of a relative slow period in the property cycle and all of the naysayers come out of the woodwork, accompanied by a large dose of spruikers looking to sell their wares to newcomer investors who want a piece of the action, but just don’t quite know how to go about it.

Developers construct high rise apartment towers in our major capital cities, looking to cash in with off the plan sales, and reel in buyers with glossy marketing campaigns and it becomes increasingly difficult not to get caught up in the frenzy that ensues.

This can see some property investors – even those who are slightly more experienced – lose sight of their own investment objectives and strategy and end up buying an asset that is completely counter-productive to their overall property portfolio.

That’s why it is critical to plan, implement and adhere to a well devised, carefully thought out investment strategy that suits your own personal needs and goals; because only when you have a clear path to follow, will you arrive at your destination without veering completely off track along the way.

A numbers game

Essentially, selecting a property strategy is all about the numbers. And the good thing about numbers is that as long as your assumptions are sensible, they never lie.

To get the numbers as close to perfect as possible, there are two things you must consider. The first is your cash flow. This is particularly important through the initial stage of investing – the acquisition stage.

There are three stages of property investing:

  1. The acquisition stage – when you’re going to acquire a portfolio;
  2. The holding stage – generally when you hold the assets until they appreciate in value and/or produce an adequate income; and
  3. The retirement stage – which may mean no changes are made to your portfolio, or it may mean selling an asset and repaying debt or living off equity, etc.

Cash is king

Cash flow is very important at all times, but obviously must be managed carefully during that crucial first stage to make sure you complete the initial acquisition quickly and carefully.

To ensure success you need to obtain as much asset for your investment dollar as possible, which gives you more time in the market, because ultimately time is what’s going to create wealth. Cash flow again takes priority in the retirement stage of your investment career because you clearly want to be able to fund your post-work lifestyle.

The second consideration when crunching the numbers is your net worth. You should continuously monitor the changes in your net worth to make sure you’re on track and heading towards your ultimate investment and financial goals.

Your net worth acts as a tool whereby you can measure your progress, so after year two, year three, year four, five and so on, you can ascertain how far you have come in your overall plan and make sure you’re on the right track.

Your net worth is key because it provides flexibility and options. That is, when you enter into retirement you might decide to sell everything and put your money in a bank account. A higher net worth will therefore produce more cash and in turn, more income.

Net worth can also be important in retirement, depending on the investment strategy you choose. You might choose to place a higher emphasis on net worth than cash flow and plan to live off the equity the net worth will provide.

Just remember that the best way to drown out all of the noise, which can easily undermine your personal approach to wealth creation with property, is to focus on the main elements of your investment strategy. Cash flow and net worth are the two financial elements of your investment journey that you must plan well and monitor as you go, in order to stay on track and reach your objectives.

For more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment goals and strategies, click here to contact us, or subscribe to receive regular post updates and industry insights.

Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: wealth@propertytycoonfinance.com.au

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