The Four most dangerous words in property investing

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Expert Advice with Michael Yardney. 28/07/2017

Wouldn’t it be great to know what’s ahead for our property?

Currently the future seems uncertain as we head into the more mature stage of this property cycle and most commentators seem to fall into one of two camps:

One group suggests we’re in for a period of slower growth, but basically the long-term property boom will continue. While the other camp suggests our property markets are going to implode.

My many years as a property investor have taught me not to try too hard to predict our markets year by year, but instead to take a long term view, then allow for cycles around this long term trend and be prepared for uncertainty, surprises and the unexpected.

However, these more uncertain economic times bring back a memory from when I was still a novice investor and one of my early mentors taught me that the four most dangerous words a property investor could say were…

“This time it’s different.”

Unfortunately, in my early days I ignored his advice to my detriment, as I found that history does in fact repeat itself. Here are some other lessons I learned along the way:

Booms don’t last forever

One of the most important lessons I learned is to never get too carried away when the market is booming nor too disenchanted during property slumps. Letting your emotions drive your investments is a sure-fire way to disaster.

During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn.

Our property markets behave cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom. This means that even as you take advantage of our strong real estate markets, get prepared for the next phase of the property cycle.

During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.

Strategic property investors buy time

Property investing is really a game of finance with some real estate thrown in the middle. Successful investing is essentially buying time with sufficient financial buffers to ride the ups and downs of the market while your asset base grows in value.

Real estate is a long term proposition and Warren Buffet said it right when he explained that: “Wealth is the transfer of money from the impatient to the patient.”


Beware of doomsayers

As long as I’ve been investing I remember hearing reasons why property values will plummet.

However, during that time “investment grade” properties in our capital cities have consistently increased in value and are likely to continue to do so. Sure, values languish at times and of course property prices fall a bit during the slump stage of the cycle, but the value of well located properties in our capital cities has never “crashed.” They’re underpinned by the large percentage of home owners who don’t jump ship when the market turns.

Follow a system

Strategic investors follow a system to take the emotion out of their decisions and ensure they don’t speculate. Let’s be honest, almost anyone can make money during a strong property market because the market covers up mistakes, but many investors without a system found themselves in financial trouble when the market turned in the past.

If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring, so the rest of your life can be exciting.


It’s about Location

Over the long-term, around 80% of the performance of your investment will be due to its location and around 20% will be related to the property you purchase in that location.

Yet during the last boom many investors forgot the age-old fundamental of buying the best property they could afford in a proven location. Instead they got sidetracked by chasing the next “hot spot” and got caught out when the mining boom faded. Or they bought “cheap” properties in secondary locations or chased cash flow in regional areas and now they feel they’ve lost out as the property boom in our capital cities passed them by.

Strategic investors do it differently…

They make educated investment decisions based on research and buy a property with a high land to asset ratio below its intrinsic value, in an area that has experienced above average long term capital growth and will continue to do so because of the demographics of the people living in the area.

Then these smart investors “manufacture” capital growth by adding value through renovations or redevelopment and hold on to their properties as a long-term investment.

Yes - it’s unlikely that things will be different this time round - history has a way of repeating itself. These are just 5 of the many lessons that I have learned over the years which I will be using to make sure I’m set for the next stage of this property cycle. What are you going to do?

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Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.


To read more articles by Michael Yardney, click here

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
 

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