How to be an A-grade investor: part 1

Everybody strives to be an ‘A-grade’ property investor, but unfortunately, most people don’t take advantage of perfect situations when they appear. 

The trick is to know what to look for and why. Windows of opportunity only happen for short periods of time, and A-grade investors are always ready to take advantage of a situation when it appears. They invest quickly and with confidence – because they’ve already done the groundwork and know where and when to buy.

So, how can you transform your portfolio and become an A-grade investor?

Interest rates

The first fact to look at as a property investor is interest rates. Interest rates normally hover around seven per cent, but at the moment, they are at record lows of five per cent or less. Building a portfolio is always reliant on the financial institutions that lend you money, and your serviceability with the banks will never be better – at the moment, you can fix interest rates for five years at 4.99 per cent.

What does this mean to the A-grade investor?

Look at this five-year scenario that assumes interest rates will be back up to seven per cent in two years’ time.

Mike and Mal each buy a townhouse with a loan of $300,000. If you look at the figures in the table, you’ll see Mal has saved $16,950 in interest over a five-year term. That’s over a whole year’s worth of interest repayments at five per cent.

Over this period, your rents would also be going up, but your interest repayments would remain the same.

A-grade investors will take advantage of this situation and buy as many properties as they can while interest rates remain at record lows.

As a general rule of thumb, people invest in regional cities because they need higher yields, but buy into capital cities because they want capital growth.

In the current market, though, you can invest in capital cities and have elevated yields because interest rates are so low. You are now targeting capital growth as well as higher-yielding properties.

Property cycles 

A-grade investors understand that all property markets have cycles, and they know how to read them.

Most people invest in areas they know well, and their emotions take over. In many cases, intelligent investors will not even view a property in person – they will base all their purchase decisions on the facts and figures only.

A lot of people use a ‘property clock’ to measure market cycles and identify when to buy.

3 to 6: Flat market This is where properties are stuck in a flat period in which they go up in value for a quarter, then down during the next, then up, then down. When you look at this over a long period of time, it evens out to be a flatline market where no growth has occurred.

6 to 9: Growth market The market is now showing signs of life because something has caused the area to change and people are now looking to live there. On most occasions, the reason for that change is job creation and an ensuing demand for houses in the area.

9 to 12: Hot market The market is in a solid growth phase. Everyone is excited about the property market and confidence levels have risen. Listed properties are bought quickly and auction clearance rates are high. Prices increase sharply.

12 to 3: Sliding market Supply has well and truly caught up with demand as the developers have oversupplied the market with new stock. Demand is no longer as high, so property prices will decrease and the market will slide backward.

All properties keep turning around the clock. Some properties will complete a full circle in approximately seven years and some markets may take 15-plus years.

Buying at the right time

A-grade investors look to the future for ideas on where to invest next. This is like buying at the bottom of the share market. On the property clock, this is represented by 6:30 to 7:30.

Not many people will invest at this point. They do not know what growth drivers they are looking for and are fearful of what will happen in the future.
C-grade investors normally buy near the top of a market cycle, at about 11, when they have seen good growth over the past few years and they feel more confident with their choice.

This is like buying at the top of the share market, and should be avoided.

People get excited at this stage, and buy quickly without studying the property market and what is going to happen in the area over the next two to three years. Their main driver to buy is that property prices are going up so quickly, they feel compelled to buy something before they go up any higher.

To be an A-grade investor, you need to change your thoughts around property. Invest when no-one else is, because you know the growth drivers (high rental yields, job creation, infrastructure, low vacancy rates, demand, low unemployment rates, etc.).

Invest while everyone else is in fear of what the future holds. There is a small window of opportunity at 6:30- 7:30, which is where you must invest to take advantage of property cycles and create equity, quickly.

Financial freedom

Most people think that rental yields will help them generate the cash flow needed for a comfortable retirement in years to come.
Yes, you do need rental income to maintain your serviceability with the banks, but capital growth is what an A-grade investor really targets. The following case study illustrates this point.

Case Study
Bill is targeting rental yield. He has bought into a small mining town with no growth drivers. Without growth drivers, there will be no capital growth.

It is a very risky strategy, as the whole town is reliant on the one mine. If there is a natural disaster or the mine closes, his investment will suffer badly.

Ben is targeting capital growth. He is in a large capital city with lots of people and lots of growth drivers coming through. The city has many industries of employment and is at the ‘window of opportunity’ that A-grade investors look for.

As you can see below, Ben is the better investor. He doesn’t risk his portfolio.

He creates equity that enables him to invest again within three years.

He understands growth drivers and buying at the right time in a property cycle. Diversification A-grade investors understand the need to have properties located all over Australia and also a variety of property types.

 
Don’t miss the next instalment of ‘How to be an A-grade investor’ where I will detail seven more tips, tools and tactics for becoming a world-class investor.

NB: (This is a fictional case study)