Making money through property investing by generating a passive income is a sweet proposition for anyone.
It is a rich man who doesn’t dream of making money without having to lift a finger for it, and the poor man who fools himself into thinking it is possible.
Talk to any successful property investor and you are bound to get the same story; that in order to create a passive income, you’ll have to work damn hard to achieve it.
Lisa Dudson, co-author of Create Wealth, a bestselling book on property investment, says many who go into in real estate suffer from a delusion that there is easy money to be made in housing.
“The whole passive income thing is a bit over-used and under-estimated, really, because nothing is free in this world – you have to work for it,” Dudson says bluntly.
A successful property investor, financial planner and entrepreneur, Dudson knows of what she speaks.
The tough talking 40-year-old Aucklander has sweated her way to financial freedom, and along the way advised hundred of clients and readers how to do it right in real estate.
Dudson says very few ever get to the stage of achieving a genuinely passive income, where rental revenues are creating positive cashflow instead of being used to finance debt.
Time for one. “It doesn’t happen in five minutes; it sometimes takes 25 years,” she says.
Patience aside, making a profit in property takes sound planning, strategy, wise counsel and firm financial foundations.
These four areas are the focus of talks that Dudson gives to property investors when she is invited to speak on the subject. She’s a regular on the lecture circuit.
Dudson drives home the same message for clients, most of whom she sees after the damage has been done.
“I’ve seen a lot people this year that have $3 million to $4 million worth of property, but they also have 95 per cent debt on it. They’re just sitting on diddly- squat at the end of the day, because if they sold it all today, they’d probably have zero in this market.”
Dudson says investors who blunder into property without a proper game plan are setting themselves up for disaster.
“They’re building up all these properties and buying all these things, but it’s not actually delivering a hell of a lot to their bottom line. Then they say they’d like to retire in five years and I say, ‘Well, how the hell are you going to do that!’ They haven’t actually given it any thought. They’re not sure what they are trying to achieve.”
If property investment requires air- tight planning, clear thinking and foresight, it also requires the right kind of personality.
Dudson says some investors might actually be better suited to the stock market, but they’ve forged into property often for no other reason than “because everyone else was doing it at the time”.
She believes that is one of the main benefits of professional advice; getting guidance about investment options that take into consideration risk tolerance, interests, desired and required rate of returns and long-term goals.
Ironically, many are drawn to property because of the belief that it is one area of investment that doesn’t require professional advice.
Andrew King, Dudson’s co-author in Create Wealth, says many view it as a safe alternative to the stockmarket, given what’s happened with finance companies and more recently the stock market crash.
“A lot of people view it as a bit more secure. They see it as something they can do themselves and have control.”
And while Kiwis have a reputation for being property crazy, King says the numbers do not back it up.
“People say New Zealanders over- invest in property, but it’s just not true. There’s only about 7 per cent of the population that does buy investment property. And that’s because it requires more effort than simply giving your money to a fund manager,” he says.
Tangible or not, at the end of the day most investors just want some assurance they’ll make some money.
Dudson doesn’t believe one is better than the other by measure of return.
“But there is for an individual – one that is better than another,” she argues.
“It depends on how active or passive you want to be with your investments; it depends on how much risk you want to take on, it depends on where your interests lie, what your skills are, all of those things are really important when deciding which investment strategy to choose.”
King agrees property is not for everyone but he has a personal preference for property. He thinks there is more be gained from it.
“A lot of sharebrokers and financial planners love to pull out these charts that show shares outperforming property but I haven’t seen a decent one yet. A decent property, done properly, will always out- do the sharemarket, I believe.”
So what constitutes a decent property done properly?
King points to several factors including buying at the right time, buying in the right area, building up equity and being a good landlord. The importance of the latter should not be under-estimated as a key factor in boosting the bottomline.
“You’ve got to treat tenants like customers, and if you treat them well, they tend to treat you well. If you manage a property well, maintain it, treat the budget well, spend money on maintenance, know the residential tenancy acts and know your rights and responsibilities – all those sorts of things – you save yourself a lot of time, a lot of grief, and you will maximise your income return.”
It is a formula that has served Rotorua’s Debbie Van Den Broek well. Last week, she was named Landlord of the Year by the New Zealand Property Investors’ Federation.
She started with one property 20 years ago and worked her way up to “less than 20” with her husband.
Van Den Broek says persistence, hard- work and high standards as a landlord have landed her in good stead financially.
“No matter what area, lower or mid class, I like to have a house that is of a good standard of repair with unstained carpets, vinyl that is not all chipped to pieces, a stove that looks clean and you want to cook on and good quality thermal drapes. At least when your tenant moves in they don’t need to clean it immediately and you’re inclined to have people look at the house more if they move in when it’s in good condition.”
She demands as much from her tenants in return and is vigilant about screening.
“I do face-to-face interviews, reference checks, credit checks . . . I will try to go around to their existing house to see how they’ve kept it, I’ll pass by their car and if it’s full of empty McDonalds wrappers and rubbish, well, I think my house is going to look like that fairly soon, too.”
Getting to where she is today, didn’t come by chance or without mistakes. Van Den Broek credits a good friend and mentor in Wellington for inspiring and advising her. She also counts financial guru Robert Kiyosaki (of Rich Dad, Poor Dad fame) and real estate tycoon Dolf De Roos as key influences.
Dudson, also an avid reader, says personal interest is another driver of success. “You’ve got to have some kind of interest in it because you’re going to have some s . . . . . experiences.”