This morning I received an email from a person who had read an article that I wrote for Entrepreneur Magazine, and he was asking what are the “fundamentals” property investors talk about so prolifically.
I got to thinking that maybe they are not so obvious. In fact I realised that they may be quite subjective as different investors buy for different reasons with very different circumstances.
So let me put 8 of my most relevant fundamental rules that should drive your property investment:
1. Cash flow - The market is not going to take off like it did in the last boom, and it is predicted that it will stay flat for the next few years as we recover from the excesses of the previous cycle. SO don’t try to speculate with high end residential stock. Rather look at property that generates cash flow - yield. That can be commercial or residential.
2. Location - cash flow is important but so is location, so be careful of the low end flats in bad areas. Would you live there? Are you prepared to go and sort out an issue with the tenant?
3.Buy good quality stock - If the building or unit is cheap, there may be a reason, and maintaining a poor building is always more expensive than you imagine.
4. Customers/tenants – all business is built around customers, so when considering an investment look at the potential to attract tenants. Let’s assume you have an industrial building selling for a high yield but purpose built for a particular business. When the lease is up and you start looking for new tenants will you have to change the building substantially to match the market needs? In residential property, this means buy near a commercial node, where there are always tenants.
5. Retail Value – finally look at the value. Any trader will tell you that good business requires that you buy for R1 what you can sell for R2, so why should property be different? Find a good buy, where the product is being sold for lower than market. There is lots out there at the moment.
6. Replacement value – how much would it cost you to build or replace the structure + land? If you can buy land down the road and build for less, it probably makes sense to do so. It is said a real estate bubble as a time where the market is paying more for second hand property than it costs to replace it. So beware if you are paying a premium over the replacement price.
7. Time – property investment is not an in and out business. It’s about creating long term passive income. Match your expectations.
8. Gearing - Don’t over extend yourself, you don’t want to be forced to sell when everyone else is doing the same. But gearing can get you great returns on your cash employed.
When we talk about fundamentals, its mostly about using common sense. Whatever your financial advisers say, property is a great way to build long term security, and you don’t have to give up your day job to do it.