I see every year as a time for learning and personal development, and 2019 will be no different.
That’s one of the best parts of being involved in the property markets.
I’m continually learning because they’re so dynamic that you never quite ‘solve the puzzle’. In fact, the puzzle is always getting reshuffled in front of you right when you think you’ve got it solved.
I’m learning from our clients, both the successful ones and the not so successful ones, I’m learning from my professional colleagues and mentors, and I’m learning from my own successes and failures.
Having now invested for over 40 years I’d like to share a few of the lesson I’ve learnt (often the hard way).
1. Don’t let emotions drive your investment decisions
Market sentiment is a key driver of property cycles and one of the reasons why our markets overreact, overshooting during booms and getting too depressed during slumps.
Most of us think we’re making rational choices but when it comes to financial matters, but in reality, we’re not.
So an important lesson is to never get too carried away when the market is booming or too disenchanted during property slumps (like many are right now).
Letting your emotions drive your investments is a sure-fire way to disaster because we tend to be most optimistic near the peak of the cycle, at a time when we should be the most cautious and we’re the most pessimistic when the media is full of the doom and gloom near the bottom of the cycle, when there is the least downside.
Yet the regular market cycles mean each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.
The lesson is that even as you take advantage of our booming markets, get prepared for the next phase of the property cycle.
2. Take a long-term perspective
In general, the Australian property market is driven by owner-occupiers who make up about 70% of all transactions.
However, property booms are driven by investors and their FOMO (fear of missing out). Similarly, property downturns are intensified by investor fear just like now when many are staying out of the market driven by FOBE (fear of buying early).
All this leads to the cyclical nature of property values and even though there are a few years of flat or falling property prices every decade, well-located real estate has increased in value on average by about 8% per annum over the long term.
In our capital cities, all market declines are temporary while the long-term increase in property values is permanent.
Imagine if you could buy the house your parents bought at the price they paid 30 or 40 years ago. How many properties would you have bought, knowing what they would be worth today?
3. Property investment is a game of finance rather than real estate
This has never been truer than in the last few years as we experienced a credit squeeze with banks restricting finance to property investors as APRA tightened credit extension.
Put simply: if you can’t get more finance you can’t buy more properties.
Smart investors understand the importance of having financial buffers in place and use an investment-savvy finance broker to help them through the maze of different lenders as well as only holding ‘investment-grade’ properties to ensure their borrowing capacity is being optimally utilised.
4. There is not one property market
While many people generalise about ‘the’ property market. there are many submarkets in Australia.
Each state is at a different stage of its property cycle, and within each state, the markets are segmented by geography, price points and type of property.
For example, the top end of the market will perform differently to the new homebuyers’ market or the investor segment or the median priced established property sector.
This year the Brisbane property market will outperform while both the Sydney and Melbourne property markets will drop a little further before stabilising later in the year.
But in each of these markets, various segments will perform better than others.
For example, in Brisbane, well-located houses will grow in value while apartments will languish due to the oversupply.
In Sydney, the more expensive segments of the market will fall more than median-priced properties and in Melbourne established villa units with their strong land component and scarcity will grow in value while other segments of the market will fall in value
I believe overall sentiment will remain poor up till the election, but our real estate markets will be underpinned by our strong economy, jobs growth and population growth.
5. Not all properties are ‘investment grade’
While there are currently about 250,000 properties for sale in Australia, in my mind less than 5% of these are ‘investment grade’.
Of course, any property can become an investment — just move the owner out, put in a tenant and it’s an investment — but that doesn’t make it an investment-grade property.
On the other hand, investment-grade properties:
- Appeal to a wide range of affluent owner-occupiers;
- Have a level of scarcity;
- Are in the right location — one with strong prospects on long term capital growth;
- Have street appeal and offer security;
- Have the potential to add value through renovations; and
- Have a high land-to-asset ratio — this is different from a large amount of land. I’d rather own a sixth of a block of land under my apartment building in a good inner suburb, than a large block of land in regional Australia.
6. Follow a system
Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes.
But when the market turned, like at the end of the mining boom, or during the GFC, many investors without a system found themselves in trouble. And it will be much the same this time round.
Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.”
In other words, if you aren’t following a system that works in all market conditions you will be caught naked when the market changes.
Strategic investors follow a system to take the emotion out of their decisions and ensure they don’t speculate.
This gives them consistent profits and reduce their risk.
I suggest you make your investing boring, so the rest of your life can be exciting.
7. ‘Get rich quick’ equals ‘get poor quick’
Real estate is a long-term investment yet some investors chase the ‘fast money’.
They’re often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy.
They often pander to the wishes of people who would like to give up their day job to get involved in property full time but, in reality, it takes most people many years to accumulate sufficient assets to do this.
Patience is an investment virtue.
Warren Buffet said it right when he explained “wealth is the transfer on money from the impatient to the patient”.
8. Beware of doomsayers predictions
Fear is a very powerful emotion that the media uses to grab our attention with messages, particularly from overseas ‘gurus’, of why property values will plummet.
While some people missed out on the opportunity to develop their financial independence because they listen to these messages, over the 43 years I’ve been investing well-located properties have kept doubling in value every ten years or so making many ordinary Australians property millionaires.
9. Treat property investment like a business
The successful investors I know have grown a substantial asset base by treating their investments like a business.
They do this by surrounding themselves with a great team of advisors, getting the right finance, setting up the correct ownership and asset protection structures and knowing how to legally use the taxation system to their advantage.
10. There will always be a reason not to invest
Every year brings its own set of crises and lots of reasons not to invest.
You can go back as far as you like in history and there won’t be a crisis free year.
Sure, some years are worse than others but there is always bad news and much of it is unexpected.
Where investors get into trouble is that rather than focusing on their long term goals, they see these crises as once in a generation events that will alter the course of history, when in reality they are just the normal path of history.
11. You know less than you think you know
There is a nearly insurmountable amount of material to learn about in the fields of property, finance and economics.
The big lesson is that I know so much less than I think I know.
The markets will humble you if you don’t check your ego at the door.
Always continue learning.
12. Don’t mistake money for wealth
I’ve often said that any problem money can solve isn’t really a problem.
While this means money will make your life easier to a certain degree, if you let money own you it will make you miserable.
I became a lot happier about 25 years ago when I realised that money isn’t true wealth. (And I learnt it the hard way!)
True wealth is what you are left with when they take all your money and properties away — your health, your family and friends, your knowledge and mindset, your spirituality and your ability to contribute to society.