For decades, b Invested founder Nathan Birch has been talking about his three golden rules for successful property investment.
These have always been that you must buy properties:
- For below market value
- With an upside for capital growth
- With strong cashflow
Recently, however, he has added two more golden rules to the list:
- Buy for below replacement cost
- Buy in an area with an upside for servicing
So what do these two new rules mean exactly? Let’s take a look
Buying below replacement cost
The cost of building, materials and labour are through the roof at the moment and showing no signs of slowing down.
Sometimes, a buy can be such good value that you are purchasing an established property for less than what it would currently cost to build that same property. That’s land value, plus the physical value of the property all in one.
Nathan is currently chasing these deals for himself and his clients and is finding plenty of opportunity out there in the market.
Buying in an area with upside for servicing
It’s one thing for prices and values to go up, but the people who live in an area need to have incomes that will allow them to keep going up and be able to service mortgage repayments on those homes when they do.
Prices in Kellyville, in Sydney’s Hills District have gone up to $1.5 million for example, so investors might assume they will double to $3 million just as fast. That won’t happen because the locals there won’t experience the income growth they would need to be able to make mortgage repayments on those prices anytime soon.
If you keep returning to the affordable entry level of the property market when you invest, you are more likely to always have upside for both capital growth and serviceability.
You’re now on the right path, but to where?
Those five commandments will help you follow Nathan’s path to success, but it’s unlikely your goal will be the exact same as his. So it’s as important to know where you want to finish up as it is to know what your current starting position looks like.
You want to plot your end destination and then the assets that you invest in are the vehicles that follow your road map to get there.
Keep a buffer
Current economic uncertainty and challenges are showing us that you can never take anything 100% for granted. It’s important to keep a buffer between you and your debt. If you walk a fine line and push the boundaries of your serviceability, you open yourself to pain if you lose your job, or rates rise, or you have an extended vacancy period for your property. That’s another reason why affordable property with strong rental yield and upside for growth is a safe option. And why buying below market value and for below replacement cost will mean you are never in a hole if things go wrong.