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Bryce Holdaway Blog post by Bryce Holdaway

What’s the Most Neglected Step by Most Property Investors

Whenever someone is interested in buying 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 are five critical steps that you need to go through when building a portfolio and trying to create some form of passive income for retirement or whatever sort of financial narrative that a person is doing it for.

But what I find is there is one neglected step all the time.

If we think about the fact that we’ve got to Clarify, Evaluate, Plan, Implement and Manage, the first step is to get an idea of what your current situation is like. This is the Clarify stage where we set some long term and medium term goals. The next is to Evaluate based on risk profile, how much surplus you’ve got and all those sort of things and what you should be looking to buy. This is followed by putting a Plan in place which we’ve talked about the fact that that is not easy but a critical step. Then next is to Implement where we go out in the field and actually buy an investment property. These are the first four steps but it’s intriguing that once all that is done, the idea of set and forget is often what happens to the portfolio.

Investors totally forget about the Manage part and forget that you need to come back and check on your plan 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 step 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 better rate that is available to you that gives you more efficiency in your portfolio and ultimately, more cash flow in retiring the debt. So, you’ve got to check the finance.

You’ve also got to have a look and say, did I buy something that is in its original condition and perhaps there is some potential to add value to it. Could you maybe get someone to 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 paid 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 your 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 then 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, getting 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 Property Portfolio Plan 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 finetune 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 are five critical steps that every investor needs to go through, but the fifth one is the most critical one that is often neglected. So I encourage all property investors to get a regular review of their portfolio to make sure they are on track.

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