A lot of people think they’re property investors, but they’re kidding themselves.
Instead, they’re playing at being investors.
I see this a lot with the self-employed, too.
They like to think they’re in business, but again, their processes, their mindset and their inability to scale their operations show they’re just ‘playing pretend’.
Anyone who’s taken the time to understand property and its incredible power to create wealth knows that for most of us, it represents the best chance of a delivering an early retirement (or at the very least, a comfortable one).
Such is the proliferation of information out there; it’s easy to think that investing is a quick ticket to prosperity and a life of tropical holidays, expensive dinners and a garage full of Italian thoroughbreds.
Well, it isn’t.
Yes, it can provide you with the lifestyle you’ve dreamed about, but it isn’t quick, and it’s far from easy. Simple; yes. But easy – no.
The reason it isn’t easy is that human beings have a tendency to follow the path of least resistance.
We’re impatient, ignorant and quick to assume things we don’t fully understand.
That’s a dangerous combination, and it’s one that plays out time and again in the world of investing.
Property spruikers and self-styled gurus know this so they pray on these characteristics all the time.
Sadly, thousands of people looking for an easy road forget their intelligent reasoning and fall for their teachings every year – and they pay dearly for it.
For decades now, I’ve advocated a simple principal.
If you want to succeed at something, look to those who already have demonstrable success doing that thing, then I follow them.
Seek their counsel and if necessary, pay them for the privilege.
If they’re unable to do this, ignore them.
So how do you know if you’re failing as an investor?
How do you know if you’re faking it instead of doing it?
Here are some clues.
If you’ve fallen into any of these traps, there’s a good chance you’re doing it wrong, and some course correction is required.
- You believe that just about any property, over the long term, is an investment. This is simply not true. There are so many ways you can go wrong here; it’s little wonder most would-be investors do this. Would it surprise you to learn that fewer than 10% of properties qualify as investment grade? Most apartments, new suburbs, regional centres and single-industry towns fall into this category.
- You’re constantly looking for the next ‘hot spot’. If you devour property magazines, TV shows and seminars delivered by newly minted gurus, you’re chasing rainbows and unicorns.
- You’re targeting high-yield properties so you can one day live off the rents. The number one goal of property investment is capital growth – not rental yields. The number or properties you need to create a long-term income stream is substantially less if you pursue capital growth over rents. The flow-on effects are massive, too. You have fewer maintenance issues, simpler management, a significantly smaller tax burden, and a shorter timeframe towards your goals.
- You think you can set yourself up in just a year or two. The right properties take time to accumulate. Capital growth takes time to build. Redevelopment or enhancement (the act of ‘manufacturing’ capital growth) takes time to plan and execute. Unless you’re sitting on a very large chunk of equity and/or savings, it takes quite a few years to build your long term ‘cash machine’.
- You only buy property in areas you like or only ones you’d live in yourself. That’s simplistic and nonsensical. Property investment is a vehicle used to achieve a financial outcome. If it makes sense as an investment, your personal preferences have no place in the decision-making process.
- You try to time the market. Yes, there are cycles in property investment but while mainstream news trumpets one or two of these, the truth is, there are hundreds of cycles all over the country. Median prices are also misleading. It’s very common for the median price in a suburb to be say, $500k, but one street might have a median price of $350k and another, $800k. Effective property investment needs to consider information at a granular level before it can accurately inform an investment decision.
- You leave no buffer in your capacity to service the debt. What if your partner loses his or her job? What if you’re blessed with an unexpected pregnancy? What if your tenant trashes one of your properties and you have to evict them and repair the damage? What if one of your parents becomes ill and they require assisted care? What if interest rates go up? Failing to leave adequate buffers in place is an unwarranted cause of stress and a common cause of ‘fire’ sales.
- You think you can do it alone. There’s an old saying I often use, “What you don’t know will kill you.” Not knowing what you don’t know is a recipe for disaster and with something as resource-intensive as real estate, ignorance can bring you unstuck very quickly. No man or woman is an island and behind all great successes, you’ll find a team of trusted advisors and coaches guiding and supporting the investor. Don’t try to reinvent the wheel so that you can stand back and proclaim what a smart guy you are. If you truly want to succeed, engage the wisdom and experience of those who’ve gone before you.
As I’ve said at the beginning of this article, property investment can deliver the life you seek, but plenty of traps exist for the unwary, impatient or the stubbornly ignorant.
You only have one life, and you don’t have enough time to make all the mistakes on your own.
You simply won’t live long enough to make them all.
If you’re going to make it as an investor, make sure you’re not committing any of these ‘sins’ and if you are, start doing something about it.