Recently I completed some management training to make myself a better manager and I was faced with what I thought was a simple question.
What is organisation?
In answering the question I had lots of different ideas on what it was, what the benefit of organisation would be and how I should do it. But there didn’t seem to be one simple answer that fitted the actual process of organisation.
(I did learn that organisation simply means “the subdivision of actions and duties into specialised functions”.) From there, the actions and duties can be handed to the person who fulfils that specialised function.
This new understanding became the building block for me to quickly and efficiently learn how to get better results from my organising. I now understood what I was really doing when I was “organising things” so I was able to be more confident getting started on it.
Now I know what you’re thinking! “Sounds great Ross, but what has this got to do with Property Investing!?”
Well, I thought that if by simply understanding the true purpose of organisation I was able to lift my abilities so much, what would happen to my property investing, and more importantly your property investing ☺ if we fully understood the answer to the question What is Property Investing?
It should form the building block for us to quickly and efficiently learn to get better results from our Property Investing.
That’s something we all want, so then what is the answer?
Well there appeared to be many answers depending on who I was answering for. For some people “Property Investing” means buying property with the hope you will receive income or capital appreciation. For others it meant buying low and selling high (to make a profit from sales). For others it seemed to be about “adding value” or rejuvenating older properties to add value. For some it was all of the above.
What I needed for my answer was to break it down an extra step, just like with organisation, and understand what is the actual process of property investing.
This was a simpler question to answer.
At Investors Direct we see property investing as a savings program. But not just any savings program! It is a leveraged savings program where the capital invested will grow equal to the Australian money supply (see our article “What lies Ahead for the Australian Residential Property Market”) and the rental returns will increase at inflation or above.
Let’s look at the difference in savings programs.
If you save $100,000 and invest it in a bank earning 5% interest, what is the outcome? The capital ($100K) will reduce in value at the same rate at which the money supply increases (approximately 9%pa on average). Meanwhile the spending power of the 5% interest you receive will reduce by inflation (average 3%pa). It looks like you will end up going backwards. ☹
If however you save the same $100,000 but this time you choose a Property Savings Plan using 50% leverage and 5% rent, what is the outcome this time? Your capital ($100K cash + $100K borrowings) will increase in value at the same rate at which money supply is increasing (approx. 9%p.a.). Plus the rent you receive will continue to increase at least in line with inflation (3%p.a. plus). That looks a lot better doesn’t it ☺
So, when is the best time to invest in properties?
To me, that is the same question as “when is the best time to start saving?”, of course the answer is “the sooner the better”, not whenever the market is good or bad. What I mean by this is, depending on your individual situation, the sooner you are in a position to invest in your property savings program the better. It may take you some time building up enough cash savings to get into the property market or you may have had equity build up over time in your existing properties but once it is there and you have the cash flow surplus to fund any holding cost then we recommend you invest immediately.
Not just buying anything but looking at the market and investing for value.
So would this all still work if I’d bought a property 2 years ago and it hasn’t grown at all (or worse it’s dropped in value). Surely I should have kept the money in the bank or is it always better to invest?
I believe there are 3 reasons why you are always better to invest.
- Leaving the money in the bank will only lead to diminishing capital value and reduced spending power of the income generated
- If the money is not invested it is much more likely the cash is going to be consumed by some other purchase or purpose. Cash doesn’t sit around for long and the world is filled with temptations. LOL☺
- If you invest your cash in value based property then it is only a matter of time before any short term hold up in the growth is replaced by a quick increase inline with the money supply and long term growth.
Hopefully understanding what property investing really is will increase your ability to get the best results out of the capacity you have.