Golden rules of property investment

If you’re an investor returning to the real estate market or a rookie looking to make your first buy, these are the rules you need to stick to, according to property guru John McGrath.

With investors returning to the market this year, I have two crucial tips to buy well.

Tip 1: Don’t try to over-finesse the timing of your purchase.

The golden rule with property investment is you must buy with a medium to long-term view. Nothing less than five years, and 10 years or more is even better.

If you’re doing that, you don’t need to bother trying to time the market cycle. Australian property is going nowhere but up. If you invest in areas with a strong growth profile, you can’t go wrong. But you have to be able to hold it for the long term. Stamp duty and other costs wipe out the first year or two of growth. Don’t think of property like shares, this is not a three-year horizon.

Currently, I think it’s a great time to buy, but arguably it always is if you’re buying the right type of property, in the right location, for the long term.

There’s good buying for investors at the lower price points.

I think most investors have been waiting to see where interest rates stop, and now they’re coming back. There’s certainly good buying available at the lower price points because that end of the market has not done as well as the top end in recent years while rates have been rising.

Tip 2: Don’t try to over-finesse the price negotiations.

Firstly, make sure you understand what you can afford, and don’t go over your limit.

There’s nothing worse than buying a property and wondering later whether you can afford it.

Refusing to go beyond your means will prevent you from worrying about the mortgage payment every month and living the next years of your life under stress.

Once you have your budget firmly in mind, do your homework on locations and pricing. Make use of all the technology that’s out there.

Look at recent sales of similar homes and go to as many opens and auctions as you can to get your finger on the pulse of the market. When you find the right property, don’t try to over-finesse the pricing.

Don’t let a great property go, for the sake of a few thousand dollars.

No one really knows the value of property. Market competition determines that. Of course, stay within your budget. But don’t let a great property go for the sake of a few thousand dollars.

If the property you want is going to auction and you’re feeling nervous about bidding, bring someone in the know with you. It could be an agent, a solicitor, an accountant, or just a friend that’s commercially experienced. Take someone who knows property, and has bid at auctions before. Some investors now are even using buyer’s agents, either for the whole process or just the negotiation part. I think that can make a lot of sense, having an expert help you select and negotiate the right property.

Always remember that everything sounds expensive when you buy it, but when you look back in 10 years, you’ll be pleased with your decision. One of my first homes was in Underwood Street, Paddington in Sydney. I sold it for $107,000 in the 1980s. McGrath re-sold it a couple of years ago for $3.6 million. I think back to the multiples when I sold it, and $107,000 was a premium at the time.

So, always keep that long-term perspective in mind when negotiating.

* John McGrath is the founder, Managing Director and Chief Executive Officer of McGrath Estate Agents

Originally published as Golden rules of property investment