The 10 most important life lessons of a property investor

I recently celebrated a another birthday.

I won’t tell you how old I am, but nowadays my candles cost more than my birthday cake!

As I’ve been investing in property, and some would suggest rather successfully, for over 5 decades, I’d like to share some of the most valuable investment lessons I’ve learned over that time in the hope that they’ll make your investment journey smoother.

1.  Have a plan

Strategic investors have a plan, know where they are heading and follow a proven system to take the emotion out of their decisions and give them more consistent results.

They make educated investment decisions based on research and buy a property below its intrinsic value, in an area that has above-average long-term capital growth and then add value to manufacture equity.

They recognise that attaining wealth doesn’t just happen, it’s the result of a well-executed plan.

Planning is bringing the future into the present so you can do something about it now!

When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because we’ll help you:

• Define your financial goals;
• See whether your goals are realistic, especially for your timeline;
• Measure your progress towards your goals – whether your property portfolio is working for you, or if you’re working for it;
• Find ways to maximise your wealth creation through property;
• Identify risks you hadn’t thought of.

And the real benefit is you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.

Your Strategic Property Plan should contain the following components:

1. An asset accumulation strategy
2. A manufacturing capital growth strategy
3. A rental growth strategy
4. An asset protection and tax minimisation strategy
5. A finance strategy including long-term debt reduction and…
6. A living off your property portfolio strategy

This means every property you buy will be the physical manifestation of a large number of decisions you've made, and that you've made in the right order.

2. Take a long-term perspective

The property market moves in cycles and in every decade there are a few years of flat or falling property prices, however well-located real estate has increased in value by an average of over 8 per cent per annum over the long term.

Imagine if you could buy the house your parents bought at the price they paid thirty or forty years ago; how many properties would you have bought then knowing what those properties would be worth today?

Research by Metropole, based on data by the REA Group and the Australian Bureau of Statistics (ABS) shows that Australia’s national median house value has risen by an enormous 540.1% over the past 42 years.

This is an average annual growth rate of 7.62%.

Of course, these numbers vary by state.

 

• Over the past 42 years, Melbourne had the highest average annual price growth for houses at 8.26%.
• Sydney was the second-fastest-growing with a 7.98% average annual house price growth, only just ahead of Brisbane .

And these are just overall averages and within each state here are some locations that have enjoyed significantly more capital growth than these averages, and other locations which have underperformed.

I guess that's how averages work.

At Metropole, we spend a lot of time researching locations that deliver wealth-producing rates of capital growth.

3. Treat your 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 type of finance, setting up the correct ownership and asset protection structures, and knowing how to legally use the taxation system to their advantage.

4. 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 from the new homebuyers market or the investor segment, or the median-priced established property sector.

And while at any time there are hundreds of thousands of properties for sale in Australia, most are not investment-grade properties.

5. The crowd is usually wrong

“Crowd psychology” influences people’s investment decisions, often to their detriment.

Investors tend to be most optimistic near the peak of the cycle, at a time when they should be the most cautious (remember market sentiment at the end of 2020) and they’re the most pessimistic when all the doom and gloom is in the media near the bottom of the cycle when there is the least downside (as is happening now.)

Market sentiment is a key driver of property cycles and one of the reasons why our markets overreact, overshooting the mark during booms and getting too depressed during slumps.

Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.

That's why I currently see a window of opportunity for property investors with a long-term focus.

This window of opportunity is not because properties are cheap, however when you look back into a three years time the price you would pay for the property today will definitely look cheap.

The opportunity arises because consumer confidence is low and many prospective homebuyers and investors are sitting on the sidelines.

At the beginning of 2023 I forecast that it would be a good year in property at a time when all the bank economists and even the RBA predicted property prices would fall further.

And I was right, probably because I've been around long enough to see patterns in the chaos.

We saw an opportunity like this since late 2018 - early 2019 when fear of the upcoming Federal election stopped buyers entering the market. And look what's happened to property prices since then.

• Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
• Also read:This week’s Australian Property Market Update – Latest Data, State by State April 23rd 2024
• Also read:Melbourne property market forecast for 2024
• Also read:Brisbane’s property market forecast for 2024
• Also read:Sydney property market forecast for 2024

I saw similar opportunities at the end of the Global Financial Crisis and in 2002 after the tech wreck.

History has a way of repeating itself.

Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.

6. There will always be reasons not to invest

Every year brings its own set of crises and lots of reasons not to invest.

You can go back as far in history as you like 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 that 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, when in reality they are just the normal path of history.

And currently, there are many stories in the media telling us why our property markets are going to crash because of the "fixed interest rate cliff" or because we'll fall into depression– and in general, these are by the same people who made the same forecast a couple of years ago.

Sure our markets are facing headwinds, but contrary to the property pessimists they won't crash.

• House prices don't fall when there is a severe undersupply of housing stock as we’re currently experiencing in both the sales market and the rental market.
• House prices don't fall when vacancy rates are less than 1% and rents are skyrocketing as they currently are.
• House prices don't fall when the unemployment rate is 3.5 % which means that anyone who wants a job can have a job and will be able to pay their mortgage.
• House prices don't fall when auction clearance rates remain above 70% and they've remained well about 70% March of this year showing the depth of buyer demand.

The extra half a million people who came to Australia in 2022 turned the supply and demand ratio on its head and these high immigration numbers are likely to continue for some years at a time when we just can’t produce enough new housing stock.

These numbers will underpin our property markets and these migrants have to set up new households and that’s driving demand and fuelling our economy.

If you think about it, we're not bringing in refugees – many of these immigrants are students and their parents are paying their way.

We also have lots of new cashed up permanent residents who tend to rent for some time before they buy and they’re not affected by higher mortgage costs.

In fact, their demand for goods and services will keep our economy growing but may also help further push up inflation which will only lead to more interest rates rises.

7. The devil is in the detail

With so much market analysis available to us today, it’s easy to get caught up in the detail and scared into inaction.

It’s better to keep an eye on the big picture and look at the property markets through a telescope and not a microscope.

8. Remember it’s about property

You’re in the business of property investment, yet at times investors forget the age-old rule of buying the best property they could afford in proven locations.

Instead, they get sidetracked by get-rich-quick schemes or glamorous finance or tax strategies and lose out.

The fact is…property is not a get-rich-quick scheme.

Don’t get carried away by the next hot spot or latest fad – make your investing boring, so that the rest of your life can be exciting.

Warren Buffet was right when he said; “Wealth is the transfer of money from the impatient to the patient.”

9. Use debt as a tool

While many people worry about debt, smart investors use “good debt” and leverage to build their asset base.

They then protect their assets by buying time by having a “rainy day” cashflow buffer set aside in a line of credit or offset account.

10. The 2 big drivers of property values

While in the short term our property markets will be driven by market sentiment, interest rates, supply and demand, and micro-economic factors; in the long term, the value of well-located properties will rise propelled by the twin factors that have always driven long-term property prices – Demographics (population growth) and the wealth of the nation.

Both of which will increase substantially over the next few decades.

I've written a detailed article about what really causes property price growth here.

What about you...

Learn from these lessons and the rollercoaster ride of your property investment career may not be as dramatic.

Remember both fear and greed will send you down the wrong path, but sense and sensibility will keep you heading in the right direction; toward real estate riches.

While there will be ups and downs and lots of problems ahead, we are indeed a lucky country and our economy will remain the envy of the developed world.

So, if like me, you are confident that Australia has a prosperous future and at the same time our population is going to grow, this means we’ll have more people who will need property for shelter and their prosperous lifestyles will allow them to afford quality property.

This means the long-term viability of our property markets is assured.

In the short term there will be some challenges and some great opportunities so it is critical to learn from experienced and successful property investors, from someone who has already achieved what you want to achieve and has retained their wealth in the long term.

Owning real assets is a powerful wealth creator and with our property markets moving on, as the report suggests, a whole new generation of property millionaires will be created over the new decade.

However, if history repeats itself, and it most likely will, most people who get involved in property investment will not become financially independent.

Many will buy the wrong property at the wrong time or in the wrong location.