[Podcast] The Property Investing Puzzle: piecing together a successful real estate strategy

While you’ve probably heard me suggest you should treat your property investments like a business, in today's podcast I’m going to explain to you the different property investment games people are playing, and how you must beware of taking advice from the people playing a different game than you are.

What do I mean by playing a different investment game?

That's what I'm going to explain to you today.

I'm also going to share with you what makes an investment-grade property, and here’s a spoiler alert...

What makes a great investment for me probably won't be a good investment for you.

Which game are you playing?

Over the years I’ve come to appreciate that property investing is a complex affair and despite all the podcasts, blogs, webinars, and so-called “advisors” the fact is that most investors fail to achieve the financial freedom they are looking for.

I’ve also learned that the various market participants are playing a wide range of games, each with their own unique goals, attitudes, timeframes, risk profiles, and incentives.

The problem is most investors haven’t figured out what game they’re playing.

And when they don’t know what game they’re playing, they’re at risk of taking their cues and advice from people playing different games, which leads to risks they didn’t intend and outcomes they didn’t imagine.

The diverse cast of property investment players

Investment players include first-time homebuyers, beginning investors, experienced investors, property developers, real estate agents, property marketers, “spruikers” and many others.

Each of these participants has distinct goals, motivations, strategies, and time frames, making the property market an intricate dance of various investment styles.

If you think about it, the type of property that makes a great investment for me at my age and with a very substantial and diversified property portfolio under my belt, would not be considered a great investment for somebody at the beginning of their investment journey.

Understanding different investing games

There is no such thing as a one size fits all property strategy or the ideal investment to suit everybody.

Instead of treating property investing as a singular game, we should view it as a collection of games, each with its own objectives and skills.

The problem is many beginning investors play the wrong game and invest for cash flow, and while cash flow is important and keeps you in the game, buying the wrong type of property means you will never build a portfolio of sufficient size to give you financial independence.

What I'm getting at is that beginning investors should be playing a different game to those who already have a substantial property portfolio and are at the next stage of their investment journey.

Yet many blogs, podcasts, and advisors lump everyone into a category called "investors," and inadvertently set them up for failure.

It's essential to recognize that each investor has their own unique set of circumstances, priorities, and goals, which means the best course of action for one person may not be suitable for another.

Property investing isn’t like sport

Embracing the diversity of investment strategies is essential for a healthy market means there will always be some people that think it's the right time to buy and others who think it's a good time to sell.

While it's essential to define your game and stick to it, it's also crucial to be adaptable to changing market conditions and personal circumstances.

What makes an “investment grade” property?

The things I look for in any investment (including property) are:

• strong, stable rates of capital appreciation;
• steady cash flow;
• liquidity - the ability to take my money out by either selling or borrowing against my investment;
• easy management;
• a hedge against inflation; and
• good tax benefits.

Here’s how you make money from an investment

Property investors make their money in four ways:

1. Capital growth – as the property appreciates in value over time
2. Rental returns – the cash flow you get from your tenant
3. Accelerated or forced growth – this is capital growth you “manufacture” by adding value through renovations or development, and
4. Tax benefits – things like negative gearing or depreciation allowances

But not all returns are created equal.

Capital growth is not taxed while rental returns are, and as your property increases in value, the rent increase also generates more cash flow, meaning capital growth is a much more important driver of your wealth creation than cash flow.

Capital growth is the most important factor of all

Now don’t misunderstand me, cash flow is the ultimate end goal.

But you only turn to cash flow only once you’ve built a sufficiently large asset base of “investment grade” properties, meaning your investment journey will comprise 5 stages:

1. The education stage – learning what property investment is all about.
2. In the savings stage – they spend less than they earn and trap this extra cash flow in a saving account, to up a deposit to invest.
3. In the asset accumulation stage – it will take 2 or 3 property cycles to build a sufficiently large asset base of income-producing properties to move to the next stage…
4. Lowering their Loan to Value Ratios – asset accumulation requires borrowing and gearing but eventually, your LVR must slowly come down so you can…
5. Live off the Cash Flow from your property portfolio

My 6 stranded strategic approach to my investing

I would only buy a property:

1. That would appeal to owner-occupiers. Not that I plan to sell the property, but because owner-occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the future as the percentage of investors in the market is likely to diminish
2. Below intrinsic value – that’s why I avoid new and off-the-plan properties which come at a premium price.
3. With a high land-to-asset ratio – doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
4. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area including gentrifying areas.
5. With a twist – something unique, special, different, or scarce about the property, and finally;
6. Where I can manufacture capital growth through refurbishment, renovations, or redevelopment rather than waiting for the market to do the heavy lifting as we’re heading into a period of lower capital growth.

Not all properties are “investment grade”

Investment-grade properties:

• Appeal to a wide range of affluent owner-occupiers
• Are in the right location. By this, I don't just mean the right suburb –one with multiple drivers of capital growth - but they’re a short walking distance to lifestyle amenities such as cafes, shops, restaurants, and parks. And they’re close to public transport.
• Have street appeal as well as a favourable aspect or good views.
• Offer security
• Offers secure off-street car parking.
• Have the potential to add value through renovations.
• Have a high land-to-asset ratio

The bottom line is buying the right ‘investment grade’ property is all about following a proven blueprint that successful investors follow.

Not all locations are created equal

I believe that location will do about eighty per cent of the heavy lifting of your property’s capital growth.

Some suburbs will always be more popular than others, some areas will have more scarcity than others and over time some land will increase in value more than others.

That’s why it’s important to buy your investment property in a suburb that is dominated by more homeowners, rather than a suburb where tenants predominate.

And you’ll find suburbs where more affluent owners live will outperform the cheaper outer suburbs where wage growth is likely to stagnate moving forward.

Overall, by focussing your research on what those often overlooked owner-occupiers are doing, you may just find an investment that outperforms the market and delivers strong value and growth over the long term.

Two-thirds of the market are homeowners

It’s interesting that while owner-occupiers are one of the most significant influences on property, they are commonly overlooked.

Think about it…with almost 70% of all homes in Australia owned by owner-occupiers, this underpins the steady long-term growth of property values.

On the other hand, investors, who comprise just 30% of the market, create our property booms (often driven by Fear OF Missing Out or greed) and our property downturns (when they exit the market by sitting on the sidelines or selling up) creating volatility.

This is why I always give the following advice to investors who are searching for a strong property performer: buy the type of property that will appeal to owner-occupiers.

As I've already explained…in my mind, an investment-grade property must have owner-occupier appeal.

What's your investment strategy?

It's important to start with the end game in mind and understand what you need and what you want to achieve.

And then you have to build a plan, a strategy to get there.

Your "end game", might look something like this...

You will have your own home with no debt against it and...

1. A substantial asset base of investment-grade residential real estate with a level of gearing against it, plus
2. Some commercial properties which bring in cash flow, as well as
3. Some income-producing assets such as shares or managed funds may be in your Superfund.

By having a mixture of growth and income assets and a conservative level of debt, you'll be able to live off the "cash machine" of your investments.

That's because attaining wealth doesn’t just happen, it really is the result of a well-executed plan.

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

Currently, I see a window of opportunity for property investors with a long-term focus.

The opportunity arises because consumer confidence is low, and many prospective homebuyers and investors are still sitting on the sidelines waiting for firm confirmation the property markets have bottomed.

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

Some words of advice

So here are some thoughts for investors…

1. There is no one right way to invest, no one optimal strategy, and no one universal goal. Different investors have different time horizons, risk preferences, income levels, personal values, emotional biases, and expectations. They also face different constraints, opportunities, and challenges in their lives and markets. Therefore, they play different games with their money.
2. Figure out your own game and stick to it: Clearly define your investing game and focus on playing it. Be cautious of taking cues and advice from those playing different games, as this may lead to unintended risks and outcomes.

As a property investor, understanding your game and staying true to it will empower you to navigate the complex world of investing with clarity and confidence.

Links and Resources:

Subscribe to Michael Yardney’s Property Update daily breifing

Metropole’s Strategic Property Plan – to help both beginning and experienced investors

Get a bundle of free reports and eBooks – www.PodcastBonus.com.au

Some of our favourite quotes from the show:

“The fact is that most investors fail to achieve the financial freedom they’re looking for.” –Michael Yardney

“There’s always going to be somebody who thinks it’s the right time to buy when others think it’s a good time to sell. That’s what creates markets, isn’t it?” – Michael Yardney

“If you do what everyone else does – if you do what 92% of investors do – you’re going to find that you won’t ever build the substantial property portfolio you’re looking for.” – Michael Yardney

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