Expert Advice with Michael Yardney. 10/02/2019
There seems to be a disconnect between what is myth and reality when it comes to the number of investment properties that people own.
We sometimes hear about “greedy” investors who own dozens of properties when this is not really borne out by the facts. Did you know that about 70 per cent of investors own one solitary property?
Plus, only a tiny percentage of the population – around 19,000 people as it turns out – own six or more investment properties.
Of course, one property is better than nothing, but it’s not likely to change your life or your retirement dramatically. This means most Australians who try and secure their financial future through property investment fail.
So why don’t investors own more properties?
Well, it’s generally because they make one of the following seven mistakes, which stymie their chances of growing a portfolio.
1. No strategy
Most people become property investors without putting much thought into it.
Some upgrade their home and turn their old house into an investment. However, that doesn’t mean it will make a good investment because they probably bought it for emotional, rather than objective, reasons.
Others buy an off the plan property based on promises made by marketers, while others buy a property in the comfort zone – close to where they live.
The problem is…owning an investment property is not a strategy. You’ve heard it before – failing to plan is really planning to fail.
On the other hand, strategic investors devise a strategy – they bring their future into the present and devise a plan to achieve the results they want.
2. The wrong strategy
Almost as bad as having no strategy is following the wrong one.
Residential real estate is a long term, high growth low yield investment. Yet many beginners chase cash flow or the next hot spot or try and make a quick profit by flipping. All recipes for an investment disaster!
Others chase tax benefits because they think negatively gearing new properties will “keep their tax down”. So, they buy a new house in an outer suburb or put a deposit on an off-the-plan unit due for completion in two years’ time, because of the higher depreciation deductions on offer.
The problem is that these properties just don’t offer the capital growth you require to grow your wealth.
3. Changing strategy
Unfortunately, some investors get spooked when markets soften and rather than sticking to a proven strategy to secure their wealth creation through capital growth, they opt for something cheap and supposedly cheerful instead.
Rather than looking at what has “always worked” over the long term they look for “what will work now.” It’s no surprise then that their smiles turn into frowns when that inferior property underperforms down the line.
4. Unrealistic expectations
One of the main reasons’ investors fail is that they’re not patient enough. They’ve read too many stories about “overnight successes” and go into property investment hoping to make quick profits or thinking they can buy seven properties in seven years, or possibly ten properties in ten minutes.
In reality, it takes most investors 30 years to grow a big enough asset base to provide a cash machine for their retirement. By then, though, many people have thrown up their hands and sold up because they had unrealistic expectations to start off with.
5. Cash flow concerns
In the same vein, you must have the cash flow to hold your portfolio for long enough so that the power of compounding can kick into gear, meaning you must have a financial buffer to see you through the lean times.
Too many investors don’t recognise that property investment is a game of finance with some houses thrown in the middle and leave themselves open to financial woes by not having rainy day money that they can draw on when needed, which often results in them selling at a bad time.
The worst thing a property investor can do is to get it “right” the first time.
Show me a booming market and I will show you an investor with their chest puffed out like a proud property peacock! They falsely believe that the rapid capital growth of their very first investment is because of their own brilliance rather than simply the result of a rising market.
They then buy their next property, the wrong type of property at the peak of the market – because they have the Midas touch remember – and become confused when the value of their property falls for the next few years.
7. Doing it alone
Because everyone lives in a property, many novice investors believe that investing in real estate is easy, when it’s not. They try to go it alone or fall prey to spruikers or marketers and soon they’re mortgaged to the hilt on a property that will struggle to grow in value enough for them to leverage from it.
On the other hand, savvy investors take responsibility for their own education, but they also understand that building a team of experts around them will help them succeed.
They know that they won’t ever know as much as the professionals and realise that it will take years and many transactions to gain true perspective.
So they formulate a strategic plan, get the right finance and ownership structures to suit their needs and only buy investment grade properties that will outperform the averages and then regularly review their portfolio’s performance to ensure they are on the path to financial freedom.
Michael Yardney is CEO 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.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.