What’s the most Neglected step by most Property Investors
Whenever some is interested to buy an investment property, I’m often intrigued at how they kind of see it as an event rather than a process. Now, I’ve talked about it a lot where I think there is 5 Critical steps that you need to go through when building a portfolio and try to create some form of passive income for retirement or whatever sort of financial narrative that that person is doing it. But what I find is there is one neglected step all the time. If we think about the fact that we got to Clarify, Evaluate, Plan, Implement and Manage, I think that if we can encourage people to do the first three steps which is to get an idea what their current situation is like in the Clarify stage and set some long term and medium term goals. And then Evaluate based on risk profile, how much surplus they’ve got and all those sort of things and what they should be looking to buy and followed by putting a Plan in place which we’ve talked about the fact that that is not easy but a critical step. Then they go out in the field and actually buy an investment property. They are the first four steps but it’s intriguing that once the property is done, the idea of set and forget is often what happened to the portfolio. They totally forget about the portfolio review part and forgetting that you need to come back and check on it regularly. The analogy that I’ve always used is, if you go to a doctor and they give you a plan at the consultation, they generally say come back in 2 weeks time or next week so we can do a check up and see that it actually works. That’s the same when building an investment property portfolio as well. So I think it is the most neglected steps by property investors by a mile.
The point here is not just about accumulating assets.
It is about fine tuning and seeing that your plan is actually on track. When you buy the investment property, you can get the best finance structure and the best rate that is available at the time. But a year or 18 months down the track, there may be a better structure or a better rate that is available to you that gives you a better chance for more efficiency in your portfolio and ultimately, gives you more cash flow in retiring the debt. So, you got to check the finance.
You also got to have a look and say, did I buy something that is in the original condition and perhaps have some potential to add value to it. Cause you could get someone to maybe re-do the kitchen and bathroom quite comfortably without too much cost. Or perhaps re-do the carpets and put a fresh paint on and you can add value to the property in four ways. Firstly, you’ll increase the market value of the property, typically, if you do the right things in the right area. You can also increase the amount of rent that you charge. You can also increase the amount of depreciation that you get which affects the bottom line of the cash flow that you are getting. And if you think about it, if you buy at a certain level this year and you add more value next year, you actually have some stamp duty savings because you didn’t actually buy the shiny new properties. You did the work yourself and pay a lower stamp duty even if the market value is now higher. So those are the sort of things that you can look to do.
Equally, you might want to talk to the property manager about, “Ok, what is the market doing to the properties that I bought in that area? Is there a chance that I can actually increase the rent by $5 or $10, maybe even $15?”. All of these things really start to matter and the compound because ultimately, as I’ve said, it is not just about accumulating assets, it is about looking at the portfolio holistically in terms of buying the right asset, get your borrowing right and getting your cash flow management in place.
But equally, putting some defence in place. So you might have gone through the process and there is a lot going on, buying an investment property, dealing with the banks for the first time but ultimately, if you set the portfolio up, you want to defend it. You want to make sure that if anything happens to your income or anything happens to your family, the whole portfolio is not at risk. So things like income protection insurance, trauma insurance, landlord insurance and so on. I think it is important that that last step isn’t neglected but I think it is very much often neglected.
There are a couple of things that we want to do when we are conducting a portfolio review. We want to see if we are meeting our goals or in some cases, exceeding our goals which means we can bring some of our purchases forward. But equally, if we are overspending and we are actually going backwards in what we do, we can fine tune and chart the course and get you back on track so that ultimately, you can achieve the goals that you started out in the first place and that is to achieve a passive income.
So in my view, there is five critical steps that most people need to go through or in fact every investors need to go through, but the fifth one is the most critical one that is often neglected and that is manage. So I encourage all property investors to get a regular review of their portfolio to make sure they are on track.