What goes up, as they say, must come down.
And segments of Australia’s property market are now in the slump phase of their cycle, catching out some naïve investors who hoped the value of their properties would rise forever.
This means investors will probably lose money in this property downturn.
Now hear me out. I’m not one of those doomsayers saying our property markets will collapse.
I firmly believe the outlook for Australia’s property market remains robust, and when prices rebound, the value of well-located investment grade properties will reach new peaks.
That’s because Australia’s real estate markets are supported by two solid fundamentals:
- our strong population growth, which ensures consistent high housing demand; and
- the wealth of our nation, which means a sizeable portion of Australians can afford a property.
But between now and the next upturn there’s going to be a painful learning curve for some property investors — those who got carried away during the boom, often because of a fear of missing out, and took on maximum debt not understanding how the cycle works.
Of course, you could be the exception.
In every property downturn, some strategic investors do well.
I kept investing during the property slump of the early-80s because I didn’t know better.
At the time there was limited information available and property statistics were only delivered annually — long after the fact.
However, in the downturn of the early-90s, during the GFC in 2008-10 and in the slump of 2011-12, my portfolio performed well, because I learnt to follow a few simple rules that help me come out on top no matter what the market is doing. So here’s my advice to you.
1. Become financially fluent
Learn everything you can about how money, finance and property work and start investing early. While a trusted mentor and team will help immensely, you still need a solid understanding of how things work to make sound decisions, otherwise, you’ll be easy prey for the many spruikers.
2. Adhere to a proven investment strategy
Follow a tried and tested system and don’t speculate.
The problem is many investors find my strategy is too simple and boring. They’re looking for something more complicated.
Your property investing should be boring so the rest of your life can be exciting.
3. Only buy investment-grade properties
I think less than 5% of the properties on the market at present are what I call ‘investment grade‘ and will deliver stable wealth producing rates of retuns.
Sure, there is plenty of investment stock out there, but don’t confuse the two.
Investment stocks are built specifically for the investor market and sold by property marketers to naïve investors. They lack scarcity and appeal to homeowners and are sold at a premium with no opportunity to add value.
On the other hand, investment-grade properties are in the right location, appeal to a wide range of affluent owner occupiers, have street appeal and a favourable aspect.
4. Invest for the long-term
Real estate is a long-term investment, not a way to make fast money.
Growth isn’t linear so there will be years when values are flat before they rise again.
Ensure you factor in sufficient financial buffers so you won’t be forced to sell when the market turns against you.
5. Follow my six stranded strategic approach and only buy a property:
- That would appeal to owner occupiers, as they buy with their hearts (while investors buy with their calculators), are willing to pay more for a home and consequently push surrounding property values higher;
- That is below intrinsic value, which means avoiding new and off-the-plan properties which come at a premium price;
- With a high land-to-asset ratio, where the land component makes up a significant part of the asset value;
- In an area that has a long history of strong capital growth and will continue to outperform the averages because of multiple drivers of capital growth and the right local demographic who will be able to afford to pay a premium to live there because they have higher disposable incomes;
- With a twist, which means something unique, different or scarce about the property; and
- Where you can manufacture capital growth through renovations or redevelopment rather than waiting for the market to grow organically.
6. Focus on value, not bargains
Bargains rarely have potential. If no one else wants to buy it today, they probably won’t in five years’ time either.
Price is what you pay, value is what you get, so buy the best property you can afford. You want to invest in the type of property you’d still be happy to own in 10 to 15 years’ time.
7. Surround yourself with successful investors
It’s been said you’re the average of the five people you hang out with the most, so surround yourself with high-performing, successful people to soak up their behaviours, habits and mindsets.
You also gain access to their experience, knowledge and resources, which will help you make better investment decisions and financial choices.
Sure a downturn can be a scary time, but there are things you can do to ensure that no matter what happens, you’ll pull through better than most.