Hindsight is a wonderful thing, isn’t it?
Let me ask you a question…
With the benefit of hindsight and knowing what you know now if you had the opportunity to do so, would you have bought an investment property 40 years ago?
I bet your answer would be yes realising that the median property price in Sydney was $68,500 back then and that you could have bought a median-priced property in Melbourne for just $40,000.
Let me ask you another question…
What if you didn’t have the benefit of hindsight and there we both were, back in 1980 and just as you were about to invest in a property I told you that in the next year or two Australia would fall into a recession and that in 6 years’ time negative gearing would be removed only to be reintroduced a couple of years later.
What if I told you there was going to be a stock market crash in 1987, and a severe recession in the early ’90s, meaning that in the first decade of owning your investment property you would have had to face all those headwinds.
Knowing that would you still have bought that property back in 1980?
Of course with the benefit of my time machine and you still being back in the 1980s as you planned to buy your first property I would also warn you about the upcoming AIDS scare and the SARS pandemic, the Asian financial crisis, September 11th, the Global Financial Crisis, the Coronavirus induced world recession.
Would still have had the courage to buy that property back then in 1980?
The answer for many people would now be: “No…why on earth would I invest in property knowing there are so many challenges, problems, and risks ahead.”
Of course, they would have missed out on some amazing wealth-building opportunities, wouldn’t they?
How do I know this?
Well, I was already investing for almost a decade back in 1980 and I did buy another investment property that year.
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And over the years the capital growth I achieved from my investment properties allowed me to keep adding to my portfolio meaning that today I have a significant “cash machine” that gives me the lifestyle choices I was looking for back then.
Of course, along the way, I’ve had some great investment wins but I’ve also made more than my share of mistakes.
And I learned many lessons that I wish I knew back then, so here are…
40 property investment lessons I learned in the last 40 years
- The economy and our property markets move in cycles. Booms never last forever, neither do busts.
That’s mainly because most of us get swept up in the optimism or pessimism of others.
Don’t be surprised when they come around and don’t overreact. This will help you avoid being sucked into booms and spat out during busts.
- Despite the ups and downs, the long-term trend for well-located capital city properties is rising values.
This long-term growth of property values is underpinned by Australia’s population growth and our demographics changes as well as the underlying wealth of our nation which allows us to afford more expensive properties.
- 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.
- Every year we get hit by an X factor – an unforeseen event or situation that blows all our carefully laid plans away.
Then every decade or so we have a major event and the world “breaks.”
- There are multiple property markets in Australia.
And even within each capital city, there are multiple property markets divided by geography, price point, and type of property.
So when somebody tells you the Australian property market is doing this, or the Sydney property market is doing that, don’t pay attention because this type of information is of no use.
You need to examine what is happening to property markets at a more granular level.
- Property investment is risky in the short term, but secure in the long term. It is definitely not a way to get rich quickly.
It takes the average property investor around 30 years to become financially independent.
Often the first 10 years is making mistakes and learning what not to do and then you need a number of property cycles under your belt to grow a substantial asset base.
- Since property is a long-term game, don’t look for “what works now.” Instead, look for “what has always worked.”
History shows that this year’s hotspot becomes next year’s not-spot.
Don’t make 30-year investment decisions based on the last 30 minutes of news.
- Residential property investment is a high growth, relatively low yield investment class.
Wealth is created by building a substantial asset base.
You do this by holding good investments for a reasonably long time, reinvesting the income you’re receiving, and allowing your capital gains to build up and take advantage of the magic of compounding.
- At times of poor or no capital growth, strategic property investors “manufacture” capital growth through property renovations or development.
- Residential investment is a game of finance with some houses thrown in the middle.
- Taking on debt is not a problem. Not being able to repay debt is an issue, meaning cashflow management is a critical part of wealth creation.
And it’s important to understand the three types of debt
- bad debt against depreciating items;
- necessary debt, such as the non-tax-deductible debt against your home; and
- good debt against appreciating assets like income-producing residential real estate.
- Successful investors have a long-term strategy to grow their wealth and use the correct asset protection and finance structures as well as insurances to mitigate their risks.
- Strategic investors not only buy properties, but they buy themselves time to ride out the cycle by having financial "cash flow" buffers in place in facilities such as offset accounts.
- Wealth is the transfer of money from the impatient to the patient. I must thank Warren Buffet for that quote.
- The media is not there to educate you, but its job is to get you to click on their links so that they receive revenue from their advertisers.
So don’t rely on the media for investment strategy or advice.
- There will always be someone out there telling you not to invest in property.
- There will always be people out there telling you to invest in property.
To understand their vested interests – they don’t usually have your best interests in mind.
- Savvy investors surround themselves with a great team and are prepared to pay their advisors – they see it as an investment, not a cost. Pay for your mentors and join mastermind groups.
- If you’re the smartest person in your team you’re in trouble.
- You are going to make investment mistakes along the way and you’ll either end up paying a significant learning fee to the market or you can pay your advisors and learn from their experience and mitigate your risks.
- No one really knows what’s going to happen to the property markets.
There are 25 million property experts in Australia - everyone seems to have an opinion about property. But you know what they say about opinions… they’re like belly buttons; everyone has one but they’re basically useless.
So be careful who you listen to.
Sure it’s important to have mentors, but make sure you’re listening to somebody who has not only built their own substantial property portfolio but somebody who has kept their wealth through a number of cycles.
There are too many enthusiastic amateurs out there offering investment advice.
- Don’t listen to who most property investors listen to for investment advice.
Accountants are good at doing your tax, mortgage brokers can help you get a loan and financial planners are good at minimising your risks, but none of these professionals are well-positioned to give you property investment advice.
- Timing the property market is just too hard. It’s much better to buy the best asset you can afford and hold it for the long term.
The truth is successful investors know how to create wealth at any point in a cycle.
Have you noticed how some investors seem to do well in good times and do even better in bad times?
Market timing isn’t really important to them.
On the other hand, do others do poorly in good times and even worse in bad times? Market timing seems to have very little effect on them either.
Interesting isn’t it?
- Any property can become an investment property – just kick out the owner and put a tenant in place and it becomes an investment property.
But less than 4% of properties currently on the market are “investment grade” and will deliver wealth-producing rates of returns
- Don’t rely entirely on property data - it can be misleading and can be twisted to say almost anything.
- Property investment is part science and part art – you need to understand and interpret data (science) but you also need the ground perspective to employ that data (art.)
- There are 4 ways you make money out of property:
- Capital growth,
- rental income,
- tax benefits and
- forced appreciation or manufactured capital growth through renovations or property development.
But these streams of income are not all equal. Tax-free capital growth is the most important.
- Cash flow is important to keep you in the property game, but capital growth will get you out of the rat race.
- You will never get rich from earned income or savings.
You need your money working for you even when you’re asleep, so invest it in income-producing residential real estate and use the power of leverage, compounding, and time to grow your wealth.
- Location will do around 80% of the heavy lifting of your property’s capital growth.
- Be greedy when others are fearful and be fearful when others are greedy.
Don’t follow the crowd because the “crowd” is either wrong or late to the party.
- Don’t do what most property investors do.
The majority of property investors fail – 50% sell up their properties in the first 5 years and of those who stay in the market, 90% of investors never get past their first or second property.
- Treat your property investments like a business. There is no room for emotions, track your cash flow, regularly review your portfolio’s performance and make your decisions based on evidence.
- Don’t look for fun or excitement in your investing.
Your property investments should be boring, but they should give you the where with all to make the rest of your life exciting.
- Diversification is for people who don’t know how to invest.
You’ll never become an expert doing a hundred things once. However, you can become a master doing one thing a hundred times.
- Having the right mindset is critical to investment success.
Your outside world is a reflection of your inside world because your thoughts lead to your feelings, your feelings lead to your actions and your actions lead to your results.
- While knowledge is important, successful investors take action. Don’t fall into the trap of analysis paralysis – there will always be risks when making investment decisions.
- There are always risks associated with investing.
Don’t be afraid of failing, because the biggest risk is not doing anything to protect your financial future.
Sometimes negative experiences, mistakes, and failures can be even better than success because they teach you something new which another win could never teach you.
However, we are often so driven to get things right that we fail to see the value in the things we get wrong. Instead, we spend our time wishing we had done it differently.
Or not doing anything at all because their fear of making mistakes paralyses us. If you get it wrong, learn from your mistake and make it count by doing it differently next time.
One “failure” can – with time – help you create many successes.
- Don’t waste your time worrying. Most things you fear will happen never do.
They’re just monstered your mind. And if they do happen to most likely to be not as bad as you expected.
Time spent worrying is time that you could spend identifying opportunities and taking action.
- Never give up. You will have failures along the way – in fact, I’m a real success at failure, but each time I’m knocked down I get up again. You need resilience to be successful.
So there you have it…
40 lessons I learned over the last four decades of investing, but since I have been investing for almost 50 years, I’ve learned even more lessons than this along the way.
So please let me leave you with a final thought…
Always continue learning.
The markets will humble you if you don’t check your ego at the door.