It doesn’t matter how long you’ve been involved in property, there are always lessons to learn.
In my mind that’s one of the best parts of being involved in real estate.
I’m always learning from the property markets because they are so dynamic that you never quite “solve the puzzle”, because the puzzle is always getting reshuffled in front of you right when you think you’ve got it solved.
And boy were there a lot of lessons to learn in 2020.
While some properties investors have done very well, many have not fared as well as they would have liked.
So, what lessons can we learn (or relearn) in 2020 to make our investment journey smoother in 2021.
That’s the question I posed to 8 property experts – here are their answers:
1. The only certainty is change
Last year, when asked the same question, my response was that the only certainty we have is that everything will change, and boy has that been true of 2020.
We have no idea what the future holds and in the face of that we can only hope for the best, but plan for the worst.
As we rode out the storm that was 2020 I was exceptionally grateful for insurance.
But not the sort of insurance you are probably thinking of though.
Let me explain…
Firstly, I had a financial buffer to see me through. Things are bound to go wrong, and they’re usually out of your control.
Make sure you have adequately provisioned for it, and that your portfolio doesn’t become the casualty of a failure of not having adequate financial buffers.
Secondly, I had quality assets, so I was safe in the knowledge that if I ever did have to sell one of my investments that there would be depth of market demand for my properties.
Quality properties, in desirable locations not only underpinned the value of the property portfolio, but also meant that I had tenants who were similarly able to weather the storm and were motivated to stay rather than seeking to take advantage of the lower rents that were being abundantly advertised.
As it turned out, I didn’t need my buffer but having it there meant that I was not only able to sleep at night, but I was also able to position myself for my next purchase and to pursue opportunities that presented themselves.
2. Have a plan
The biggest reason I see property investors fail is they don’t know precisely what they want to achieve, and they do not have a plan in place to get there.
On the other hand, the highly successful investors that I meet with have a precise picture of where it is they want to be over the longer term and then break it down into manageable timeframes and regularly check in to ensure they are on course.
Interestingly I only recently learnt that a plane is off course 90% of the time and the pilot is the one that continually checks in and brings the plane back on track to reach eth final destination.
The majority of investors have a buy and hope strategy, they buy something and hope it will give them some kind of financial independence.
They don’t know precisely what it is they set out to achieve and they rarely assess their properties performance.
Being the pilot of their future, if we used the aeroplane analogy, they would never reach their final destination.
My advice for 2021 is the have a well thought out Strategic Property Investment Plan in place, don’t leave it to chance.
That way you bring your future into the present and do something about it.
3. Minimise your risks so you can maximise your returns
Raiss says: The lesson this year is nothing new – while strategic investors structure their purchases to protect their assets and maximize their cash flow, most investors put little thought into which entity should own their properties.
As real estate is a long-term affair, the name in which you buy your property investment can have significant ramifications when it comes to managing future cash flow or when it’s time to sell up.
The correct use of an appropriate trust to own your property could give you flexibility, improved your taxation outcomes and allow you to effectively manage changes in your personal circumstances.
As your life situation changes, from say a junior employee to being a business owner, you inherently move into a more litigious path, so it makes sense to set up the correct structures to minimise your risks right at the very start.
My investment tip for 20201 is to review your affairs with the view to minimising your risks.
- Do you have sufficient financial buffers in place?
- Do you have a will or a power of attorney?
- Do you have sufficient life and income protection insurance?
- Are your assets owned in the right name?
- id you know that equity in assets owned in your own name can be protected against personal litigation without the need to transfer the property which would incur both a capital gains tax and stamp duty imposts? These strategies do not require changes in title or refinancing and are relatively simple and cost effective.
4. Don’t try and time the market.
Robert Chandra – Senior Property Strategist at Metropole Sydney explains that even though they are armed with all the research available in today’s information age, economists never seem to agree where our property markets are heading and usually get their forecasts wrong.
You see…market movements are far from an exact science.
It’s more than just fundamentals (which are relatively easy to quantify) that move markets.
One overriding factor the experts have difficulty quantifying is investor sentiment.
And if you think about it, the top and the bottom of the market are really only one or two days or weeks or months in the cycle.
If you buy the right investment-grade assets, time in the market is much more important than timing the market.
5. Monitor the performance of your investments.
They are either emotionally tied to their property or have a belief, which actually a “hope”, that the property will perform better into the future.
In many cases it is clearly evident that the properties will not outperform over the longer term, as they are located in secondary locations where there is unlikely to be significant economic growth meaning little growth in jobs or wages.
If you were holding a $600,000 asset and it grew by 2.0% over a year, your asset base would have only grown by $12,000.
If you had of purchased an asset in a superior location which grew by 5% per annum it would have grown in value by $30,000.
While the difference doesn’t sound like much, this superior capital growth and the extra rental you would have achieved would continue compounding in future years and in turn give you many more options to grow your asset base faster.
Some investors make the mistake of thinking how cold is it under performing as it is not costing them anything, when clearly it is – there is clearly a significant opportunity cost.
My biggest tip for 2021 would is to have an independent property strategist help you assess your portfolio’s performance.
By looking at your investments like a business they may see opportunities that you have missed, or give you advice on which underperforming properties to dispose of, allowing you to acquire better performing properties.
6. Become a borderless investor
Australia is made up of many real estate markets, which don’t always move in sync – they each have their own cycle.
Just look at the significant variance of the different property markets in 2020 - values were falling in one market and rising in another.
Investing in a city other than your own can be a wise way to spread risk across multiple markets.
Over the years I’ve come across a large number investors who strictly buy in their own state because it’s in their comfort zone, rather than because it made good investment sense, often to their detriment.
On the other hand, those investors who have diversified property portfolios have benefited as different capital cities each had their own day in the sun – as their cycles peaked at different times.
One of the benefits of this diversified strategy is that you always have one or two properties that are growing in value strongly allowing you to approach the banks for more finance.
You may also benefit by paying less land tax as buying in a different States will expose you to a new land tax threshold
7. Our property markets are fragmented
A lot has been made of the falling values in Sydney and Melbourne in the middle of last year, however it must be remembered that in each State there are multiple property markets, defined by geography, price point and type of property, each at their own stage of the property cycles.
Yet most reports generalise about “the Melbourne property market” or “the Brisbane market”, but not all properties are the same and one can’t count on the rising tide to lift all ships.
Careful property selection is critical for investment success.
My 2021 tip is not to wait for the market to do the heavy lifting, but to “manufacture” your own capital growth by adding value to your properties through renovations or development.”
8. Property Investment is a game of finance
This was confirmed over the last few years as there have been continual changes in the lending environment affecting homeowners’ and investors’ borrowing capacity.
A few years ago the rules of the game changed significantly, making it increasingly difficult to obtain finance even with strong serviceability and significant equity.
But more recently falling interest rates and banks increasing appetite for new loans has spurred the property market forward.
The mooted changes that should loosen banking lending restrictions in March this year will increase the borrowing capacity for most property investors and home buyers and again push the property market forwards
So what are you going to do in 2021 now that you’ve learned these lessons?
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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