Twelve important property investment lessons for 2018
Friday, February 2, 2018/
I see every year as a time for learning and personal development. That’s one of the best parts of being involved in the property markets.
I’m also learning from the property markets. They are so dynamic that you never quite “solve the puzzle” because it’s immediately reshuffled right when you think you’ve got it solved.
I’m learning from my 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 learned (often the hard way).
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, overshoot during booms and get too depressed during slumps.
So an important lesson is to never get too carried away when the market is booming or too disenchanted during property slumps.
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. We’re the most pessimistic when the media is full of doom and gloom near the bottom of the cycle, when there is the least downside.
Yet 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 even as you take advantage of our booming markets, get prepared for the next phase of the property cycle.
Take a long-term perspective
The property market moves in cycles, 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 around 8% per annum over the long term.
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 then knowing what they would be worth today?
Property investment is a game of finance rather than real estate
The game of finance has never been clearer than in the last few years, with banks restricting finance to property investors and the Australian Prudential Regulation Authority (APRA) tightening credit extension.
Put simply: If you can’t get more finance you can’t buy more properties.
Smart investors 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.
There is not one property market.
While many people generalise about “the” property market, there are many submarkets around 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.
And it is likely both the Sydney and Melbourne property markets will outperform again in 2018, driven by their strong economies, jobs growth and population increase.
Not all properties are “investment grade”
While there are currently around 250,000 properties for sale in Australia, in my view less than 2% 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 “investment grade”.
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 a high land to asset ratio – this is different to 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;
- Have the potential to add value through renovations.
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 global financial crisis, many investors without a system found themselves in trouble.
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.
Get rich quick = 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 that: “Wealth is the transfer on money from the impatient to the patient.”
Beware of doomsayers predictions
Fear is a very powerful emotion the media use to grab our attention with messages, particularly from ‘gurus’, of why property values will plummet.
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 10 years or so, making many ordinary Australians property millionaires.
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.
There will always be a reason not to invest
Every year brings its own set of crises and 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 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. In reality, they are just the normal path of history.
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.
Don’t mistake money for wealth
I’ve often said 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 learned it the hard way!
True wealth is what you are left with when you money and property is taken away – your health, your family and friends, your knowledge and mindset, your spirituality and your ability to contribute to society.
These are my 12 lessons, please let me know what you learned in the comments below. Here’s to hoping that we learn a lot together in 2018.