Most Australians would understand that residential real estate has been a very good investment over long periods of time.
Despite Australian property being an incredible asset class, the reality is that most property investors never seem to be able to make the most of its potential and only ever accumulate very small property portfolios.
We know from ATO data that 98 per cent of Australian investors only ever reach 1-2 investment properties.
With that fact in mind, it begs the question as to what most investors are doing wrong?
My perspective is that instead of following the crowd and getting the same result as everyone else, you should look at what the elite investors are doing are model your strategies on them.
So what are the elite investors doing that we can take note of?
Buying Blue Chip
There’s a reason the wealthy look to invest in the very best locations. Over the long term, the growth the best areas generate is nearly five times that of the worst performers.
The top one per cent, invest in locations that have a proven track record of growth over a long period of time. They choose to invest in blue-chip areas that are in high demand and have a very tight supply.
Waterfront locations where there is simply no more land available are always high on the list for wealthy investors as people will pay a premium for these types of locations.
The other reason elite investors choose to buy in blue-chip areas is because they understand there is demand coming from other affluent buyers.
Home prices are only able to rise if there is another buyer who is able to pay higher prices. As most locations are driven by owner-occupiers, if prices are unaffordable then other owner-occupiers are not able to pay higher prices.
This is rarely the case in the most in-demand locations as there are always a stream of would-be buyers looking to try and buy into these areas. Affluent buyers who are typically business owners or high-level executives are not normally constrained by borrowing capacity in the same way as regular wages earners.
Focus on Income
The wealthiest investors in the country also understand that you need money to make money.
One of the biggest barriers for most new investors is the ability to borrow enough money from the banks. Typically, lenders will cap your borrowing based on your income and if you’re buying negatively geared properties, you’ll end up in a position where you will run out of serviceability at some point in the future.
So it’s important to understand that you will need a certain degree of income to get you started and to maintain your property portfolio. We know that there are benefits to this with the likes of negative gearing allowing for substantial tax benefits. However, focusing on your income in the short term can help set you up long term.
If you understand that there will be a cap on your borrowing at some point, you can see why it’s critical that you have the bulk of your money invested in high performing assets such as blue-chip property.
By focusing on quality over quantity, you’re able to continue to see steady capital growth and will also have the benefit of a far more resilient portfolio in times where there is weakness in the property cycle.
Wealthy people tend to make good business decisions – it’s how they made their money in the first place. So it’s well worth paying attention to how they invest as well.