ABCs of Real Estate Investing

The framework for successful property investors

The ABCs of real estate investing are used by property investors to take the guesswork out of finding investment-grade properties.

It’s a structured framework that includes the analysis of the real estate market, the buying process, and the forecasting of realistic rental cash flows.

Hence the acronym - ABC.

Because most investors borrow to buy their investment properties, yield, or the rent investors receive from their properties is very important.

This is because, when investors buy cash-flow-positive properties, they can continue to borrow to buy multiple properties, which allows them to create a portfolio.

That’s why informed investors use the ABCs of real estate investing.

This guide shows you a practical step-by-step approach to finding cash-flow-positive properties that will make you a wealthy investor.

The guide begins by investigating why real estate has inherent, long-lasting value, then explains step-by-step how to buy and manage cash-flow positive properties so you can build a profitable portfolio.

The permanency of property

Investors love real estate because it’s permanent.

You can alter the land, i.e. you can turn a forest into farmland, farmland into desert, but no matter what happens to land, it’s still there.

Therefore, land has a value that cannot be erased like the value of stocks, bonds, and cash.

Additionally, the land is only created during volcanic eruptions, therefore the creation of new land during a person’s lifetime is negligible.

Land therefore has real value because its supply is essentially fixed and from a human perspective, it lasts forever.

Competition for land is always increasing

Whilst the supply of land remains constant, the number of people on the planet is constantly growing, so competition for land is always increasing.

Therefore, as time passes, land becomes relatively more scarce.

And this increasing scarcity leads to the increasing price of land in real terms.

That’s why real estate is the only asset class that has real, long-lasting value, and why investors love real estate.

The most desirable real estate is in the cities

Not many people want to live in a desert.

Most people want to live close to where there are good jobs, schools, infrastructure, medical facilities entertainment, etc.

Most of these opportunities and facilities are in cities, and that’s where the highest demand for properties is.

Within cities, the location of the most desirable jobs and accommodation are in the Central Business District (CBD) and the suburbs immediately surrounding it.

This is why properties close to city centers generally attract the greatest interest from owner occupiers and investors, and enjoy the highest capital gains.

Which Cities?

According to the Australian census data, 80% of Australians (20.1 million) live in 19 cities, and 67% of the population live in a state or territory capital.

Table 1 below lists the 19 cities ordered by the fastest growing with the capital cities in bold.

Table 1: Population and Growth Statistics for the Largest 19 Cities in Australia

Source: Australian Bureau of Statistics

These Australian cities offer the property investor the greatest potential for yield and capital gain because they have multiple economic drivers, a growing GDP, and a growing median income.

So, if you're considering investing in a smaller town, ensure it also has these characteristics.

The power of control & influence

One of the unique aspects of owning real estate is the decision-making power investors have both strategically and operationally.

Investors can choose to live in their property, let it to permanent tenants, let it short-term to holidaymakers and corporates visiting for conferences etc., or let it by the room i.e. student accommodation, or they can leave it vacant.

Whatever they choose to do, they are in control of their property.

Similarly, investors can choose to renovate, improve, extend or knock out walls in their house, install a granny flat, whatever they like.

If an investor owns an apartment, they are a little more restricted, but they can still renovate and improve the property.

Whatever the investor chooses to do allows them to control the usage and income the property makes.

Therefore, property investors are in charge of the strategic decisions and direction they would like their investment to take, as well as the income model they would like to pursue, and therefore the cash-flows they can achieve.

The importance of cash flow

Most people buy investment properties and rent them to others.

However, buying investment real estate can take 30 years.

This is because most property investors need to borrow.

That’s where the power of cash-flow analysis comes into play within the ABCs of real estate investing, because once you get the cash-flow forecasting right, you can build a large portfolio of investment properties that reflect your investment goals.

Investment goals & criteria

The first thing you need as a property investor, is a property investment plan that includes your investment goals and criteria.

Investment goals refer to what you ultimately want to achieve with your investment.

For example, do you want to focus on capital appreciation or would you rather focus on rental income, or a mix of both?

If you need to borrow to buy your investment property, then it’s likely your focus will be on cash-flow.

Secondly, you need to establish your investment criteria.

This includes your location preferences and the type of property you want to buy i.e. a house or an apartment.

So let's now consider the investment goals and criteria we'll use for the step-by-step example in this guide.

The assumptions

We’ve already established that the CBD and surrounding suburbs in the 19 largest cities in Australia are where the best investment grade properties are to be found.

So for this step-by-step example of how to find a cash-flow positive property, I’m going to choose the city of Brisbane.

I'm also assuming you’re going to need to borrow to buy the investment property, so therefore I’m assuming your goal is to purchase a high-yielding apartment with reasonable capital appreciation.

I’m also going to assume that you're going to buy and hold for at least 30 years.

As part of setting your investment goals you need to be clear on what your budget is.

There are several costs involved in the purchase of a property including stamp duty, mortgage registration, transfer fees, conveyancing, loan establishment fees as well as pest and building inspections, etc.

All of these costs need to be included in your budget to work out what the maximum dollar offer is that you can make on a property.

For your budget, I'm going to assume that you can afford an apartment up to $600k allowing for a 20% deposit ($120k), which can either be equity in an existing property, or cash.

I'm also going to assume you have the money to cover the purchasing costs and that you’ve seen a mortgage broker, and you’re pre-approved for finance.

Please note, you can also buy an investment property with as little as a 5% deposit.

And you can buy investment properties in Brisbane for less than $200k.

So don’t worry if the budget in this example is out of your reach because the same ABC process applies to any property, regardless of it’s value or it's location.

This is what the purchase costs will look like if you buy a $600k property in Queensland.

Qld stamp duty on $600k $20,025.00
Mortgage registration $208.83
Transfer fee $1,856.07
Property valuation $1,000 - $3,000
Solicitor / conveyancer $700 - $2,000
Pest & building inspections $400 - $600
Mortgage application fee $150 - $300

Total $23,339.90 - $24,989.90

If you don't have a 20% deposit, lenders will want you to take out Lenders Mortgage Insurance (LMI), which on a 10% deposit will be around $10.8k and for a 5% deposit it will be $20k.

A lower deposit might be appealing to you, because a 10% deposit in this case is $60k, and a 5% deposit is only $30k, which means you can buy an investment property much sooner.

The other advantage of a smaller deposit is that the LMI can sometimes be included in the amount the bank lends to you.

Once you know what your investment goals are and what you want to purchase, and where, along with what you can afford, the next step is to work out exactly which suburbs you want to invest in and then find the best property available within those suburbs.

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