‘An investment Philosophy’ is a set of core investment principles and beliefs that guide a person’s investment decision making processes.
Owning an investment property is similar in many ways to owning a business. If you want your business to be profitable and viable over the long term, you cannot simply ignore it and expect it to perform well.
Any business requires attention and a considered strategy to be successful and to avoid stagnating. Similarly, an investment property will not continue to perform well over the long term if it is not treated with the appropriate diligence and care.
An investment in knowledge, pays the best interestBenjamin Franklin
Five key areas to consider for your investment philosophy:
1. Repairs and Maintenance
Do you have a proactive maintenance plan or do you simply react when your tenant reports a problem? While not all repairs could be handled through proactive maintenance, many can. So taking a proactive approach will improve the relationship with your tenants.
Regular servicing is extremely beneficial. You will get a much longer life cycle, and therefore a lower average cost out of the following if you have them serviced on a regular basis – air conditioners, roofs and guttering, driveways, car parks, lifts, roller doors etc.
Always remember to consider that longer-term upgrades will keep your property attractive and help to avoid longer vacancy periods. Read more about this here
2. Cash Flow vs Capital Growth
One is simply not better than the other, it depends on your intentions. Some people require cash flow, while others may have strong income and are happy to take a lesser return in trade for better capital growth prospects.
When considering buying an investment property you should think about your long-term strategy and exit plan. Are you reliant on the income out of the property or are you banking on capital growth? This should also impact how you review the suitability of a purchase.
Wise spending is part of wise investing, it’s never too late to startRhonda Katz
3. Lease Structure
Would you allow your tenant to occupy your property on a monthly lease?
Monthly leases offer no protection or longevity for your income, as the tenant could give you a months’ notice to vacate at any given time. Naturally, it could cause considerable financial stress if such notice came at an inopportune time. Terms that you put in a lease will also have a huge impact on the financial viability of your investment.
For example, you should consider what annual rent increases are included in the lease, plus have a market review to be applied at any option term, to ensure your holding costs don’t start to erode your return.
It’s also very important to know whether the lease is a net or gross structure (i.e. whether the tenant pays the outgoings), as this could have a huge impact on the performance of your investment.
4. Self Management vs Agent Management
Having a professional agent can offer a broad range of advantages, including improving the relationship with the tenant. An agent should have good systems in place for the day to day operations of the property, as well as being readily available for any assistance the tenant needs. Most commonly an agent will have professional accounting software to keep track of all of the income and expenditure, which will make your tax reporting far simpler.
A professional agent will apply the relevant increases due under the lease and recover any costs or charges from the tenant, in accordance with the lease, which are items often overlooked by owners who self-manage. A professional agent should also offer the owner the benefit of established relationships with tradespeople and contractors, meaning any works should be completed in a more timely and cost-effective manner.
How do you view your tenant? If “property investment” is your “business” then the tenant is your customer. If you treat your tenant as a valued customer, you will likely have a better “business” with less frequent turnover of tenants, meaning fewer vacancies and a better return.
Value your tenant, as without them, you don’t have a business.
Successful investing is about managing risk, not avoiding itBenjamin Graham