How to Cultivate the Mindset of a Successful Property Investor

Date: 18/05/2011

Principal of Melbourne's Wakelin Property Advisers, Monique Wakelin spoke to Mortgage House about the psychology of property investing.

There should be a vast difference in approach between buying an investment property and buying your own home.

The trap is that property is a tangible asset so the tendency is to adopt the same subjective and emotional mindset as you would if you were buying your home.

The big mistake is to look at an investment property and say, could I live here? Yet ironically that's the first question most people ask themselves.

The answer automatically colours and clouds rational decision-making processes because if you don't think you can live in the house you will almost certainly conclude that it's not a wise investment property.

Conversely, if you can see yourself living in it your next thought will most likely be, it must be a good investment.

Investing in property requires self-awareness and self-control.

That's why I tell my clients that 90 per cent of my job is to prevent them from becoming emotionally involved.

A successful property investor has to engage in self-talk and say: "It doesn't matter a jot whether I can see myself living in this place. All that matters is whether it will make me money."

Property is not a short-term asset class

The strategy for property investors is to avoid churning through assets - buying, selling, buying, selling - because of all the costs involved - stamp duty, legal costs and a truckload of capital gains tax.

The smartest approach is to accumulate property and when you have sufficient capital growth in the asset have it reassessed, look at your cash flow and equity position and decide if you can afford to purchase another asset and leverage against the equity in your current acquisition.

That way your capital gain is not subject to capital gains tax.

Tips

1) Invest when it feels almost counter-intuitive to do so. That is, when markets are quieter and a bit softer, as they are now.

2) Contemplate investing in property as a long-term proposition, which means that strategically it matters less when you get into the market and is more about buying the right asset and staying put.

3) The first thing a property adviser needs to do is ensure you get your asset selection right based on the track record of the growth performance of a particular property in a specific street and area.

4) This is a growth-oriented investment. You have to buy assets that have scarcity value. That doesn't mean they're quirky. Often they're very conventional for their period and their style but because there's a limited supply and high demand they go up in value very strongly and predictably.

5) Essentially, property investment is all to do with the location and architecture.

Rental yield

When you're in your asset accumulation phase the purpose of rental yield is to help bridge the shortfall between your income and the mortgage repayment. As time goes on and the value of the property rises and the proportion of the total value that is accounted for by the loan becomes smaller, (either because you've got good capital growth and rental income increases) that gap/shortfall reduces.

Once you've got that increased cash flow it's time to get another asset because you're not getting much in the way of negative gearing benefits anymore.

As you move through the different stages of your life the role of rental income changes. When you're in the phase of accumulation it helps you fund the loan repayment. As you get older and have a portfolio of three or four properties that you've accumulated over 20 years, plus you've got your superannuation and other assets, you may decide that you don't want to work full time anymore. That's when you'll look at your portfolio, ascertain your total debt and sell one or more assets to pay out all your debt.

When you're looking to retire the rental return will begin to supplement your working income. When you're fully retired it should, together with income from your other assets, replace your working income.

And always remember that it's the capital growth in residential property that underpins rental income and not the other way around.

How to choose a property adviser

The way to assess the quality and independence of a property adviser is to find out who will be paying them.

The first question a prospective client should ask anyone they're considering appointing should be around establishing the independence of that adviser.

Ask the adviser how they get paid. If the answer is that the advice won't cost you anything because remuneration comes from elsewhere, run quickly.

The bottom line is, the person who is doing the paying is the person who is being looked after and you want that to be you.