As a property investor who’s taken out dozens of mortgages, I follow the general principle: it’s not about what you pay, it’s the money you make. This means I’ve never really spent much time sourcing the lowest interest rates, admin fees or best add-ons such as offset or redraw accounts. In fact, I’m happy to pay 1% or 2% higher interest rates and have admin fees on top, if it allows me to buy and hold more property.
I’ve long advocated this strategy to other home buyers and investors.
Buying well
Home buyers can spend so much time weighing up one loan against another. It’s true that a cheap mortgage could save you hundreds – and it’s worth trying to find a good product – but a well-bought property can save you many thousands.
Which would you prefer? Shifting your focus to the latter can reap rewards. Concentrating on buying a better property can not only give you a steady stream of good rental returns it can also give you more capital growth.
That’s where buying well is so crucial. They say that you make money in property when you buy, not when you sell. Whether you are an owner-occupier or an investor, this means you either want to purchase properties at less than their market value or pay a reasonable price to secure one that is likely to grow faster than the properties around it.
But how do you buy well? Switch your focus from shopping for a loan to research. Look at as many properties as possible to get an idea of prices and know what adds value. It’s common for established investors like me to look at 50 to 100 properties before we make a purchase in a new area.
If it saves you 10% on a $300,000 property, that’s $30,000. And if you manage to get 10% growth rather than 7%, then that’s an extra $9000 profit every year. Can a mortgage give you savings like that within the same time frame?
Buying more
As an investor, I focus on buying as much property as I can. When you borrow more money, you often need to pay mortgage insurance and higher interest rates – this could be an extra $5000 on a $500,000 loan.
So I need to decide whether low interest rates and fees will benefit me more than the ability to borrow more money.
The answer is often they’re not. If I can borrow more to buy just one additional property then that could equate to another $25,000 to $50,000 I make every year beyond those additional fees.
Borrowing more money – especially when interest rates are rising – can increase your risk. This makes it even more important to buy better properties in better suburbs that can easily be rented or sold at any time.
Property investing is a long-term game so you need to ensure you have enough cash buffer to manage any difference between your rent and your mortgage.
The bigger picture
The reality is that buyers get so engrossed in the details they lose sight of the bigger picture. Because there’s so much money at stake, it’s crucial to keep a financial perspective, not an emotional one.
Chris Gray is a leading property expert who provides opinion and commentary regularly on Sky Business News, A Current Affair and other news media. He is a regular columnist for Real Estate Journal (REINSW), Queensland Property & Lifestyle (REIQ) and other property media. A property investor since age 22, Chris today builds property portfolios for time-poor investors – searching, negotiating and renovating on their behalf. For a FREE copy of his latest book, The Effortless Empire: The Time-Poor Professional’s Guide to Building Wealth from Property, visit www.yourempire.com.au
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
