I was recently asked to distil my property investment philosophy into a few simple rules.
That’s a big ask: distil all the mistakes I’ve made and seen others make, as well as all the lessons I’ve learned and those of the many successful investors I’ve worked with into a few simple rules.
Anyway, here’s my attempt.
1. Become financially fluent
The secret to financial freedom is to spend less than you earn, save the balance and then wisely invest your savings in growth assets.
Learn how money, finance and property work and start investing early so you have time and compounding on your side.
Along the way, learn from proven mentors and get a good team around you. But make sure you have a thorough knowledge base, because while you can delegate or outsource many tasks, it’s critical to understand if you’re being given impartial advice or if you’re being taken advantage of by the many vested interests after your money.
2. Adopt a proven investment strategy
Wealth is created by building a substantial asset base. You do this by holding good investments for a reasonably long time, reinvesting the income you’re receiving and allowing your capital gains to build up.
Residential real estate is a high-growth, relatively low-yield investment, so I recommend a capital growth investment strategy.
While cash flow is important to keep you in the game, it’s capital growth that will get you out of the rat race, so first concentrate on building a substantial asset base over a number of property cycles, then slowly lower your loan-to-value ratios and eventually you’ll be able to live off your “cash machine”.
It’s too hard to become rich the other way around — from savings or cash flow.
3. Not every property is investment grade
While virtually any property can become an investment — just put a tenant in — few properties are “investment grade” and will strongly outperform the averages over the long term.
Remember that while the location of your property will account for around 80% of its performance, it’s also important to own the right property to suit the local demographic.
4. Demographics drives markets
Over the long term, demographics — how many of us there are, how we live, where we want to live and what we can afford to live in — will be more important in shaping our property markets than the short-term ups and downs of interest rates, consumer confidence and government meddling.
5. Real estate investing is a game of finance with some properties thrown in the middle
Recognise that property is a long-term play, so set up financial buffers to help you ride the property cycles.
6. The economy and our property markets move in cycles
It’s a common fallacy that Australian property cycles last seven to 10 years. They vary in length and are affected by a myriad of social and economic factors and then, at times, the government lengthens or shortens the cycle by changing economic policies or interest rates.
Market sentiment is one of the key drivers of property cycles and one of the reasons why our markets overreact, overshooting the mark during booms and getting too depressed during slumps.
Remember, each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
7. Follow my six-stranded strategic approach and only buy a property:
- That would appeal to owner-occupiers. Not that I suggest you sell the property, but because owner-occupiers will buy similar properties, pushing up local real estate values. This will be particularly important as the cycle moves on, as the percentage of investors in the market is likely to diminish.
- Below intrinsic value — that’s why I’d avoid new and off-the-plan properties that come at a premium price.
- With a high land-to-asset ratio — this doesn’t necessarily mean a large block of land, but a property 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 that will continue to outperform the averages because of the demographics in the area. These suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals can afford to, and will be prepared to pay a premium to, live because they have higher disposable incomes.
- With a twist — something unique, different or scarce about the property; and finally
- Where you can manufacture capital growth through renovations or redevelopment rather than waiting for the market to do the heavy lifting.
8. Don’t focus on bargains — they rarely have a future
In today’s informed market there are very few bargains. Properties that no-one else wants today will probably be the type of property that no-one else will want in five years’ time.
Price is what you pay, value is what you get; so buy the best property you can afford — the type of property you’d still be happy to own in 10 to 15 years time.
9. Allow for an x-factor
Every year there are a few “x-factors” — unforeseen events or situations that blow away all our carefully laid forecasts. These x-factors can be negative or positive and can be local or from abroad.
Sure, there are plenty more property rules, but remember I promised to keep it simple.