The 4 most dangerous words in property investment

Today I would like to share a memory from when I was still a novice investor.

One of my early mentors taught me that the four most dangerous words a property investor could say was… property time market clock house cycle investment timing watch growth

“This time it’s different.”

Unfortunately I ignored his advice in my early days of investing to my detriment, as I found that history does in fact repeat itself.

The best way to explain what I’m on about is to just trawl the Internet and look back over the last 20 years and you’ll two extreme opinions about Australia’s property markets:

  1. One group has been suggesting we are in for consistent long term capital growth in property values.
  2. Another has been suggesting the property markets are going to implode.

In my view the extremists, in both directions, will be wrong

Why?

Because history does repeat itself and having invested (some would say reasonably successfully) for well over 40 years, I’ve learned some lessons.

Probably the most important lesson I have learned is to never get too carried away when the market is booming or too disenchanted during property slumps.

Letting your emotions drive your investments is a sure-fire way to disaster.

Let me explain this in more detail by looking at 6 big lessons I’ve learned over the years:

Lesson 1. Booms don’t last forever

During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn. 

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Our property markets behave cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom

At some time over the next few years this new property cycle  we have just entered with buoyant market conditions  especially in the Sydney and Melbourne property markets, will be followed by a downturn which will pave the way for the next upturn which will lead to the next boom.

Going forward over the next decade we’re likely to have another recession, but I’m not sure when since it’s been quite a while since we’ve had one and we might even have another depression one day – because history repeats itself.

The lesson from all this is that even as you take advantage of our strong real estate markets, get prepared for the next phase of the property cycle.

During the last cycle, most investors didn’t really have their downside covered or their upsides maximised.

2. Understand the difference between Expectations and Forecasts

I expect there to be a recession in the next decade. But I don’t know when it will come.

I expect that some investments I make won’t do well. But I don’t know which ones they will be.

I expect the property market to boom and then prices will tumble again. But I don’t know when.

I expect interest rates will rise. Probably not for a number of years. In fact, I don’t know when.

And I expect another world financial crisis. But I have no idea when it will come.

Now these are not contradictions or a form of cop out.

You see…there’s a big difference between an expectation and a forecast.

An expectation is an acknowledgement of how things worked in the past and will likely work in the future.

A forecast is putting a time frame to that expectation.

Of course, in an ideal world we would be able to forecast what’s ahead for our property markets with a level of accuracy. But we can’t, because there are just too many moving parts.

Sure there are the statistics that are easy to quantify, but what is hard to identify is exactly when and how millions of strangers will act in response to the prevailing economic and political environment.

And then there are all those X factors, unforeseen events that comes out of the blue, which could be local or overseas that undo all the predictions and all forecasts we made.

So what do you do about this?

Well…some people just keep forecasting anyway, and the media carries stories from these experts looking for a headline giving them a false sense of precision and veracity.

Then there are the other forecasters who  just extrapolate, assuming our future will resemble our past. But it won’t.

In mind both of these methods can be dangerous. I’ve found it’s more practical to have expectations without specific forecasts.

That’s because when you expect something to happen at some stage in the future, you’re not surprised when it comes.

It forces you to invest with room for error, and psychologically prepares you for the inevitable disappointments.

This is exactly how I planned for the most recent property downturn.  I didn’t know when it would come, how long it would last or how it would affect the value of my property portfolio or the cash flow of my business.

I just knew a downturn would once again. And I was prepared for it with cash flow buffers.

There is a huge difference between, “I expect another next property downturn sometime in the next decade” and “I expect the next property downturn in the second half of 2024.”

One of the big differences is how I invest.

If I expect another property boom followed by another property bust, I’m not surprised when they come.

But since I don’t know when they’ll come, I won’t make the focus of my property investing trying to time the property cycle.

Because trying to time the property cycle is one of reason many property investors fail.

On the other hand, strategic investors maximise their profits during booms and minimise their downside during busts by investing in assets that have always outperformed, rather than looking for the next hot spot or for the type of property strategy that works “now” rather than one that has worked in the long term.

They own investment grade assets in investment grade inner and middle ring suburbs of Australia’s three big capital cities. The type of property that keep growing in value over time without fluctuating wildly in price when the property cycle slows down.

Lesson 3. Beware of Doomsayers

As long as I have been investing, I remember hearing people with excuses why property values will plummet. news bad economy

However during that time well located capital city properties have doubled in value every 10 years or so.

Sure home values languish at times and of course property prices fall a bit during the slump stage of the property cycle, but the value of well located properties in our capital cities don’t “crash.”

They’re underpinned by the large percentage of home owners that don’t jump ship when the market turns.

However, fear is a very powerful emotion, and one that the media used to grab our attention.

Sadly some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.

Lesson 4. Follow a System

Strategic investors follow a system to take the emotion out of their decisions and ensure they don’t speculate.

This may be boring, but it’s profitable.Chess and hand

Let’s be honest, almost anyone can make money during a strong property market because the market covers up most mistakes:  A rising tide lifts all ships

But many investors without a system found themselves in financial trouble when the market turned.

Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.”

In other words, if you aren’t following a system that works in all market conditions you will be caught with your pants down when the market changes.

If you prefer to have consistent profits and reduced risk, follow a proven system.

Make your investing boring, so the rest of your life can be exciting.

Lesson 5. Get Rich Quick = Get Poor Quick

Real estate is a long term proposition, yet some investors chase the “fast money.” money coin

You’ve probably met people like that – they look for that one deal that will make them fabulously rich.

When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.

They are often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy.

Their stories can be very compelling, even hard to resist and they usually pander to the wishes of people who would like to give up their day job to get involved in property full time, but in reality it takes most people many years to accumulate sufficient assets to do this.

Patience is an investment virtue.

Warren Buffet said it right when he explained that:

“Wealth is the transfer of money from the impatient to the patient.”

Lesson 6. It’s about the property

You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations.

Instead they got sidetracked by chasing the next “hot spot” and got caught out when the mining boom faded. 39653963_l

Or they bought “cheap” properties in secondary locations or chased cash flow in regional areas and now they feel they’ve lost out as the property boom in our capital cities passed them by.

Strategic investors do it differently….

They make educated investment decisions based on research and buy a property below it’s intrinsic value, in an area that has experienced above average long term capital growth and will continue to do so because of the demographics of the people living in the area.

Then these smart investors “manufacture” capital growth by adding value through renovations, refurbishment or redevelopment and hold on to their properties as a long term investment.

These are just 5 of the many lessons that I have learned over the years.

What have you learned?

Please leave your comments below.

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Michael Yardney

About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'The 4 most dangerous words in property investment' have 5 comments

    Avatar

    August 28, 2015 andrew

    Remember from 1988 to 1991 property prices dropped 45%, i bought my first “well located property” in 1987
    & it crashed like every other well located property. It took almost a decade to recover. Next time we get 17% interest rates history will repeat.

    Reply

      Michael Yardney

      August 28, 2015 Michael Yardney

      Andrew You are wrong – the general market DID NOT drop 45% – after the 1988 stock market crash property values rose considerably then fell a little in the early 90’s

      Of course this was the big capital cities – but the Gold Coast crashed – is that where you bought?

      That’s why property property selection is critical

      Reply

        Avatar

        January 16, 2018 Ben

        I think if one finds emotional control, rational thinking, statistical analysis and mathematics to be boring, property investment/ development is probably the wrong line of business.

        Reply

    Avatar

    August 28, 2015 Brian

    I couldn’t agree more. As an investor since the 70’s The one lesson I wish I had learnt earlier is the cycle of markets in good locations, residential, commercial or industrial. I remember buying properties under $20k in areas like Mt Hawthorn (inner city Perth) only to sell a few years later in the $30k’s. and thinking I had done very well. I couldn’t buy them back now for much under $1m. Had I simply held and refinanced and known that I had to hold through lows that are leading to the next upturn my portfolio would be much bigger

    Reply


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