Do you understand the 3 stages of property investing?

We are at the beginning of a new year - one where property prices are likely to continue to grow strongly.

In the past, this stage of the property cycle was the time when lifetime wealth was created by a small group of investors.

But if history repeats itself, and most likely will, most property investors won’t develop the financial freedom they are looking for.

Why do I say that?

Well…you just look at what happened during the previous property cycle, and the one before that, and the one before that.

Note: Despite property values increasing over the last few decades, with the value of many properties doubling and doubling again, statistics show that around 50% of those who got into property investment sold up in the first five years.

And of those investors who stayed in the market, 92% never got past their first or second investment property.

And you can’t become financially free by only owning one or two investment properties.

So, for an investor to make the most of this new property cycle, they must understand that property investment is a process.

And that the property they eventually buy should be the physical manifestation of a whole lot of decisions they have made.

And all this starts with following a proven property strategy.

It is a long-term journey made up of 3 stages

However, most investors treat property investment like an event - they focus on the here and now – the property purchase.

What tends to happen is they find a property they like, often close to where they live, and buy that property, thinking it will make a great investment because that’s what they would be happy living in.

Even worse, at present, we are seeing FOMO (fear of missing out) creeping in, with many investors lowering their selection criteria in order to get a foot on the property ladder.

Others are overextending their budgets, and yet others are taking shortcuts just to get into the current fast-moving market.

They’re in a hurry. They don’t realise that it takes most investors 20 to 30 years to develop financial freedom through property.

You see… the typical journey of successful property investors involves three phases or stages.

Stage 1. Learning what NOT to do

The first stage is where property investors learn about investing.

They read blogs, watch videos and listen to podcasts exploring the many alternative points of view and eventually end up trying a number of different investment strategies.

Note: The most common outcome is that they’re usually not much better off financially than when they started investing, even if they have been investing for years.

This stage can last 5-10 years, but eventually, these investors realise that what they’re doing isn’t working.

Unfortunately, some investors remain stuck at this level forever, either they’ve lost heart or they’ve lost money and can’t continue their investment journey.

Stage 2. Finding a winning formula

A small group of investors moves up to the next stage because they’ve taken the time to critically examine what has worked for them and what hasn’t.

At this point, they have gathered a good team of independent professionals around them and developed enough wisdom to find a strategy that works for them.

They’ve also learned to stop listening to all the opinions on the internet and the white noise in the media.

These more successful investors formulate a strategic property plan which includes:

• a proven system to choose investment-grade properties, realising that these account for less than 4% of all the properties currently available on the market.
• a finance plan, to not only help them buy their first property but the next and the next.
• a structure and ownership plan to protect their assets and pass them on to future generations.

These investors have learned that residential real estate is a high-growth, but relatively low-yield investment so rather than invest for cash flow they buy well-located investment-grade properties to build their asset base over a number of property cycles.

While they recognise that it’s capital growth that will get them out of the rat race, investors at Stage 2 have learned the importance of cash flow management to see them through the ups and downs of the cycle.

Stage 3. Building a “cash machine”

A very small percentage of investors ever reach Stage 3 of the investment journey.

Once these strategic investors have built a substantial asset base, they slowly lower their loan-to-value ratio so that their property portfolio becomes a cash machine.

This is the stage where property investors not only realise they’re on a winning formula, but they recognise how to strategically use their resources efficiently and safely to head towards their financial objectives.

They are now more in control over their financial destiny.

Where do you fit in?

Statistics show that around 90% of investors are at Stage 1.

Many remain stuck there for a long time, until they become aware enough to critically examine how their investments are performing, or they have someone else objectively help them review their past experiences.

Stage 2 investors make up most of the remaining 10%, and are heading in the right direction, but would do much better if they could move up to Stage 3, where their resources and capacity are allocated strategically without being influenced by the markets and other people’s opinions.

Stage 3 investors make up less than 1% of all property investors.

Why don’t most property investors move out of Stage 1?

I’d suggest this is because they're often not even aware they are stuck in Stage 1!

Note: They know no better. They’re what I call financially illiterate and are subject to the cyclical ups and downs of the property market.

Stage 2 investors’ activities can still be subject to market movements, but they are more financially savvy and have found a winning formula to grow their property portfolio.

On the other hand, that small group of property investors who make it to Stage 3 of their investment journey are what I call financially fluent.

They understand their way around the finance, tax and property markets and have built themselves a substantial asset base and a cash machine that gives them choices in life.

They are not as affected by the vagaries of the property in financial markets and go on to build lifetime and intergenerational wealth.

Where are you on your investment journey?

What are you going to do about this?

I see the current market offering a window of opportunity for property investors with a long-term focus.

You see…we are at the stage of the property cycle where there will still be considerable capital growth.

Of course, I'm not suggesting you try to time the market- this is just too difficult, and in truth, you’ve missed the bottom, which occurred in early 2023.

But if the market hands you an opportunity like this, why not take advantage of it?

I see strong capital growth around Australia, with all capital cities reaching new highs, driven by:

• Expansive first-home buyer stimulus

• Lower interest rates beginning to fully flow through

• Rising household incomes

• Persistently tight housing supply

• Lower listings volumes

But be careful. Less than 4% of properties on the market are what I would currently call investment grade

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

About Michael Yardney Michael is the founder 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 one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.