Today is the first birthday show of the Michael Yardney Podcast.
Rather trying to come up with something new, I decided to try and distill the information, investment philosophies, tips and tricks that I and my guests have shared with you over the past year into one jam packed show.
As you listen to today’s show you’ll hear some of the most important insights I’ve shared over the past 52 weeks, all in one episode.
I’ve called it….
The Rules of Property Investment
1. Become financially fluent
The secret to financial freedom is to spend less than you earn, save the balance and then wisely invest your savings in growth assets.
Learn how money, finance and property works and start investing early so you have time and compounding on your side.
2. Adopt a proven investment strategy
Smart 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.
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.
Residential real estate is a high growth, relatively low yield investment, so I recommend a capital growth investment strategy.
3. There is not one property market.
While many people generalise about “the” property market there are many submarkets around Australia.
Each state is at a different stage of its property cycle and within each state the markets are segmented by geography, price points and type of property.
4. Not every property is investment grade
Remember that while the location of your property will account for around 80% of its performance, it’s also important to own the right property to suit the local demographic.
There are around 9.6 million dwellings in Australia and at any time there are about 250,000 properties for sale.
But not all properties make good investments!
In fact, in my mind less than 2% of the properties on the market currently are what I call “investment grade.”
While there are a lot of properties built specifically built for the investor market – think the many high rise new developments that are littering our cities – most of these are not “investment grade.”
Some would call these properties “investment stock” – they are what the property marketers and developers sell in bulk to naïve investors, but they are not “investment grade” because they have little owner occupier appeal, they lack scarcity, they are usually bought at a premium and there is no opportunity to add value.
On the other hand, 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, restaurants and parks. And they’re close to public transport – a factor that will become more important in the future as our population grows, our roads become more congested and people will want to reduce commuting time.
- Have street appeal as well as a favourable aspect or good views.
- Offer security – by being located in the right suburbs as well as having security features such as gates, intercoms and alarms.
- Offer secure off-street car parking.
- Have the potential to add value through renovations.
- Have a high land to asset ratio – this is different to a large amount of land. I’d rather own a sixth of a block of land under my apartment building in a good inner suburb, than a large block of land in regional Australia.
5. Demographics drives markets
Over the long-term demographics – how many of us there are, how we live, where we want to live and what we can afford to live in – will be more important in shaping our property markets than the short-term ups and downs of interest rates, consumer confidence and government meddling.
More of us are going to live in our capital cities, rather than regional Australia and the bulk of the population growth will occur in the big 3 east coast capital cities because that’s where the economic growth and jobs growth will occur.
6. Real estate investing is a game of finance with some properties thrown in the middle.
Strategic investors recognise that property is a long-term play, so they use finance to not only buy themselves properties but to buy themselves time to ride the ups and downs of the property cycle.
They set up financial buffers to help you ride the property cycles.
And they also protect their assets by owning them in the right ownership structures. For many this is in trusts.
7. Take a long-term perspective
Real estate is a long-term investment, yet some investors chase the “fast money.”
The property market moves in cycles and even though there are a few years of flat or falling property prices every decade, well located real estate has increased in value on average by around 8 per cent per annum over the long term.
Imagine if you could buy the house your parents bought at the price they paid thirty or forty years ago; how many properties would you have bought then knowing what they would be worth today?
8. The economy and our property markets move in cycles
It’s a common fallacy that Australian property cycles last 7 – 10 years.
They vary in length and are affected by a myriad of social and economic factors and then, at times, the government lengthens or shortens the cycle by changing economic policies or interest rates.
Market sentiment is one of the key drivers of property cycles and one of the reasons why our markets overreact, overshooting the mark during booms and getting too depressed during slumps.
During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn.
Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
And over the next decade or so we’ll probably have a recession and we’ll most likely have another depression one day.
During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.
9. Beware of doomsayers
As long as I have been investing, and that’s close to 40 years now, I remember hearing people with excuses why property prices will stop rising, or even worse, why property values will plummet
However, in that time, well located properties have doubled in value every 8 to 10 years.
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.
10. Follow my 6 Stranded Strategic Approach and only buy a property:
- That would appeal to owner occupiers. Not that I suggest you sell the property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important as the cycle moves on, as the percentage of investors in the market is likely to diminish.
- Below intrinsic value – that’s why I’d avoid new and off-the-plan properties which come at a premium price.
- With a high land to asset ratio – this doesn’t necessarily mean a large block of land, but a property where the land component makes up a significant part of the asset value.
- 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. These suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals can afford to and will be prepared to pay a premium to live because they have higher disposable incomes.
- With a twist – something unique, different or scarce about the property, and finally;
- Where you can manufacture capital growth through renovations or redevelopment rather than waiting for the market to do the heavy lifting.
11. Don’t focus on bargains – they rarely have a future
In today’s informed market there are very few bargains.
Properties that no one else wants today will probably be the type of property that no one else will want in 5 years’ time.
Price is what you pay, value is what you get; so buy the best property you can afford – the type of property you’d still be happy to own in 10 to 15 years’ time.
12. Don’t try and do it in isolation
Very few property investors can successfully build a true property investment business without having a core community of peers with whom they can associate, share ideas, get candid feedback, and soak up new ideas.
If you want to change your outcomes, have you considered upgrading your peer group?
The top 2 reasons why your peer group matters so much:
- Your peer group’s attitudes, beliefs, and behaviours are contagious. They impact on the way you think, your ability to spot and take advantage of opportunities and your behaviors as you go after (or don’t go after) your financial goals. Alone you are vulnerable; connected we are strong.
- We all have blind spots and limitations, but your peers can help you bridge these gaps and share resources that help you make better decisions and financial choices.
13. Allow for an X factor
Every year there are a few “X factors” – unforeseen event or situations that blow away all our carefully laid forecasts away.
These X-factors can be negative or positive and can be local or f rom abroad.
14. There will always be a reason not to invest
Every year brings its own set of crises and lots of reasons not to invest.
Sure, some years are worse than others but there is always bad news and much of it is unexpected.
Where investors get into trouble is that rather than focusing on their long-term goals, they see these crises as once in a generation events that will alter the course of history, when in reality they are just the normal path of history.
15. You know less than you think you know
There is a nearly insurmountable amount of material to learn about in the fields of property, finance and economics.
The big lesson is that I know so much less than I think I know. Always continue learning.
16. Don’t mistake money for wealth
I’ve often said that any problem money can solve isn’t really a problem.
While this means money will make your life easier to a certain degree, if you let money own you it will make you miserable.
Links and Resources:
Some of our favourite quotes from the show:
“The worst thing that can happen to a property investor is to get it right the first time, because they think they’re smarter than they are.”
“Patience is an investment virtue.”
“True wealth is what you are left with when they take all your money and properties away – your health, your family and friends, your knowledge and mindset, your spirituality and your ability to contribute to society.”
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