Expert Advice with Michael Yardney. 28/08/2018

If real estate is as good an investment as we make it out to be, why do so many property investors fail?

Why do 50% sell up in the first five years and why do 92% of those who stay in the game never get past their second property.

While there are a myriad reasons why so many investors don’t achieve their goals, I’ve found these five are the most common.

1. No strategy

Firstly, they don't know what they're doing!

What I mean by that is they "decide" to become investors but generally buy a property in their own suburb or possibly in a particular location because they heard that it’s soon going to boom.

Often these are regional locations which are on the cusp of big things. The problem is that "big thing" either never eventuates or is only temporary (mining boom anyone?) and before they know it they're lumped with a property that doesn't increase in value. Or worse still, one they can't get even get a tenant for.

Frequently they've chased cash flow rather than capital growth because they don't understand that residential real estate is a high growth, relatively low yield investment.

2. No investment education

Similarly, novice investors often are poorly educated about what makes a good investment.

On the other hand, sophisticated investors recognise there is a big difference between investment grade properties (ones that will outperform in the long term) and investment stock which has been built by developers to sell to investors and generally underperforms because it’s the wrong type of property in the wrong location.

At the same time they invest in their ongoing personal development by continually educating themselves, by having mentors and by joining mastermind groups.

3. Wrong finances

Many investors just don't have the necessary financial know-how to last the distance.

Rather than having a finance strategy, they overcommit financially and choose their loans based on the lowest interest or cheapest fees.

What they should have done at the outset was consult a finance strategist who thinks a few steps ahead (to the next property and the next) rather than just concentrate on the first purchase.

Smart investors set up a financial buffer, through an offset account or line of credit, which can be drawn upon in times of financial squeezes.

They also have the financial discipline to keep that "rainy day" money for when they need it, because they recognise that real estate investing is a game of finance with some properties thrown in the middle.

Strategic investors not only buy properties, but they “buy time” through their buffers.

4. Timing the market

A bit like investing in the next "hotspot", many investors think they're being strategic when they try to time the market.

You know…buying in a location because of a solitary new infrastructure project that they believe will turn a poor location into a superior one.

Another non-strategy is attempting to buy at the bottom of the market and sell at the top when they don't understand market mechanics enough to do that.

Often they end up buying a property in a market that was never going to outperform the averages, such as an off-the-plan property in an area that is about to be flooded with supply of the same type of stock.

While you don’t really want to buy at the peak of the market, sophisticated investors buy their next property when their finances allow them, rather than worrying too much about market timing.  They know that the correct location will do eighty percent of the heavy lifting of their property’s performance and then they buy a property in that location that they’d be happy to hold in the long term.

5. Set and forget  

There is a relatively common theme in real estate, which supposedly is a sound investment strategy. It's those properties which are "set and forget".

You know the ones?

They're the properties that you never have to do anything to because they'll just sit there and grow in value year after year. In fact, you don't even have to think about them at all.

That's not a strategy. It's a big mistake.

All properties will need some attention over the many years that you hold them.

At some point in your journey, you'll need to upgrade it to ensure it holds its value as well as attracts the best tenants.  Neglected properties are not the ones you want in your portfolio.

Smart investors regularly review their portfolio's performance to understand which ones need attention and which ones might even need to be jettisoned so they can buy better performing properties.

The good news is...

You don't have to be one of the many failed investors in Australia.

In fact, you already have a head-start by reading articles like this one.

While there are professionals who can help investors buy the best properties, that doesn't mean you should shirk responsibility completely.

By continually learning about how to grow wealth through real estate, you're much more likely to be one of the investors who makes it to the finish line at some point in the future.

Rather than the many who are left licking their property wounds wondering where it all went so horribly wrong.



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.