Legendary investor, Warren Buffett, once famously said, “The first rule of investing is ‘Never lose money’. The second rule is ‘Never forget rule number one’”.
He also said, “Never invest in anything with the idea it is okay to lose money.“
In the context of real estate investment, when you buy real estate that produces positive cash flow over cost, is located in a good location and appreciates over time, you know you have Warren Buffett’s pearls of wisdom in the bag.
By applying proper risk analysis on the location and the property, it is easier for you to determine which deal would bring great success. Any property would be a worthy investment provided it has low equity risk, and can produce positive cash flow and appreciation in all economic environments. While other properties may look all the more impressive, if they come with high equity and cash flow risks, the less likely it is for you to appreciate your asset and increase your ROI.
Then there is the temptation to buy discounted properties or highly affordable dwellings. The deal sounds good as it can maximise the appreciation potential and cut great returns, but this might not be the best strategy.
Quoting Warren Buffett, “It is far better to buy a wonderful company with a fair price than to buy a fair company at a wonderful price.”
Cheaper is not always better. The reality is, most investment firms prioritise on selling products that are affordable for you. However, the best deals and best returns often involve buying high and selling higher.
Having to pay $50,000 or $150,000 extra should not change your opinion on the deal if you are going to hold it for more than 10 years. Remember, a worthy deal is not determined by the price you pay, but rather, it is determined by the amount the next person is willing to pay. But you must evaluate and validate your risk and return.
For residential real estate, it is not a secret that gross yield is low and the top performers achieve 4.5% to 5.2% on average. After deducting operational property cost, you only get 2% to 3% net. Add in the mortgage cost and you usually have break-even or negative cash flows. To pay a bit out of your pocket or to earn nothing is perfectly fine if you have tax benefits that will adjust the cash flow or when the capital growth is outstanding. However, choosing to lose money each year is ridiculous as it can be offset easily by excellent equity acceleration.
The problem today is that many properties do not appreciate well enough within a reasonable time. As an investor, you cannot afford this especially if you want to create significant wealth and leverage from real estate investing. The only way forward is you must validate the property risk and return before making any purchase, or run a thorough risk and Australia economic growth assessment with your investment budget. These simple steps will save you a lot of money and assure your investment goals are on the right track.
To apply for risk validation or a custom risk research, please contact us at Invest in Properties.