Today I'd like to share how I'll be investing in 2023 and how our team at Metropole will be helping our clients invest in property in 2023.
Whether you’re new to the game or you've already built a property portfolio you’re likely to benefit from what I'm about to share.
That’s because initially, I'm going to share some of the frameworks that will be relevant no matter where you are in your investment journey, and even if you've heard them before they may be a good reference point or offer a new perspective from which to think about your own plans and what you could be doing.
And then I'm going to share some concepts I haven't discussed on this podcast before – I’ll explain the three different categories of fundamentals that I consider when making investment decisions.
As long as I've been investing there has been the question of whether to invest for capital growth or for cash flow.
Now to be honest I'm greedy and I want both, but there’s no doubt that the more important factor to focus on is capital growth because that's where the real wealth in property investment is made.
If you speak to anybody who has owned property for any length of time and they work out how much rent they have collected, and particularly how much they've kept after tax and expenses, and they then compare the tax-free capital growth they have made, invariably the capital growth will be significantly more.
Now I understand that cash flow is important, especially at a time of rising interest rates and increasing holding costs for your property. But remember that cash that keeps you in the game, while capital growth gets you out of the rat race in the long term.
Even though there will be investment opportunities in many regional towns around Australia, there will be more great opportunities in our 3 big capital cities where economic growth will lead to wage growth and stronger population growth, particularly through immigration.
I’ll be looking for locations within those cities that are in continuous strong demand by an affluent demographic – locations where people really want to live and aspire to live and are able and prepared to pay to live there.
These should also be areas where there is strong demand from affluent tenants who can afford to and are prepared to pay higher rents and will be able to do so over the long term.
I'm only going to invest in prime properties, what I call “investment grade properties” as this is the type of property that gives you the most growth and an easier ride along the way.
You see... any property can become an investment - just kick the landlord out and put a tenant in and it becomes an investment, but I'm only going to invest in properties that will generate wealth-producing rates of return.
- Appeal to a wide range of affluent owner-occupiers
- Are in the right location.
- Have street appeal as well as a favourable aspect or good views.
- Offer security.
- Offers secure off-street parking.
- Have a high land-to-asset ratio.
- Have the potential to add value through renovations.
Over the next few years, it is likely that we will have a period of subdued capital growth, so rather than waiting for the market to do the heavy lifting I would only buy the type of property to which I could add value through renovations or redevelopment.
That doesn't necessarily mean I would have to undertake the renovation or development straight away, but I like to buy properties that have upside potential.
It’s important to remember that property investment is a process, not an event.
In fact, it’s likely to take you 20 to 30 years to develop a big enough asset base to give you the cash flow for the lifestyle you desire.
The difference between the average property investor and a strategic property investor is that most property investors find a property they like and then look for some data to justify their preconceived decision – this is an emotional decision and we all know emotions and investments don’t mix well together.
If you’re a beginner looking for a time-tested property investment strategy or an established investor who’s stuck or maybe you just want an objective second opinion about your situation, I suggest you allow the team at Metropole to build you a personalized, customized Strategic Property Plan.
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because we’ll help you:
- Define your financial goals.
- See whether your goals are realistic, especially for your timeline;
- Measure your progress towards your goals – whether your property portfolio is working for you, or if you’re working for it;
- Find ways to maximize your wealth creation through property.
- Identify risks you hadn’t thought of.
An important factor that will help investors win at property this year will be to focus on the long term.
If you let yourself get scared or distracted by all the noise the media will keep throwing at you this year, it's likely that you will not do anything.
Now I know intuitively most people will nod along and agree with this, but I’ve found it very difficult for many people to take action when the media is full of negative messages.
The best way I've found to overcome this type of procrastination is to focus on the long term and make your investment part of a long-term strategic plan as I have just discussed.
Another way I'm going to invest in property this year is to treat it as a business, rather than as a set-and-forget asset.
But many people misunderstand what I mean when I say treat your property as a business and they think I mean it will generate cash flow like a “business.”
But as I've tried to explain, residential property investment is a strategy to grow your wealth in the long term, not to generate your wealth in the short term.
Residential real estate is not an asset class that will churn out sufficient cash flow to support your lifestyle in the short term.
Your long-term property journey is likely to consist of 4 phases:
- The education stage.
- The asset growth stage of your investment life could take 20 years or more.
- When you have a substantial asset base you then enter the transition stage where you slowly lower your loan-to-value ratios
- Then can live off the cash flow of your property investments and other assets.
In other words, you initially need to make your money elsewhere through your job or profession and move it into property.
It's important to understand the current market is driven by consumer sentiment - how buyers and sellers feel about their own financial situation and what they anticipate the future will hold.
However, we know help quickly market sentiment can change so while we take that into account in your assessment of what's likely to be ahead, we look at a range of fundamentals To get a comprehensive picture of their economy in their property markets because combining a number of indicators is more effective than isolating a few variables.
The type of things we look at pull into three main categories:
1. Leading indicators
Leading indicators present economic data that point to the future direction of the economy and our property markets. Things such as:
- consumer confidence,
- business confidence
- Share market indices
2. Coincident indicators
Coincident indicators reflect the current state of the economy, showing whether it is in a state of growth or contraction. Things such as:
- GDP which indicates the country's overall economic performance
- Personal income - rising incomes indicate a healthier economy and incomes that lag suggests slow growth ahead.
- Auction clearance rates = a great in-time indicator of property buyer and seller sentiment
3. Lagging indicators
Lagging indicators take place after key economic events often confirming what has taken place on previous days.
- Interest rates that respond to changes in inflation. When rates rise, they slow economic growth and discourage borrowing, typically signalling a strong economy. On the other hand, low-interest rates promote economic growth.
- Consumer price index - A key measure of inflation
- The unemployment rate - this has many spillover effects impacting consumer confidence, consumer spending, and in turn retail sales and GDP
What are your property plans for 203?
While there will be ups and downs and lots of problems ahead, we are indeed a lucky country and our economy will remain the envy of the developed world.
So, if like me, you are confident that Australia has a prosperous future and at the same time our population is going to grow, this means we’ll have more people who will need property for shelter and their prosperous lifestyles will allow them to afford quality property.
This means the long-term viability of our property markets is assured.
Sure, in the short term, there will be some challenges but there will also be some great opportunities.
Owning real assets is a powerful wealth creator and with our property markets set to bottom out and reset sooner rather than later, a whole new generation of property millionaires will be created over the new decade.
However, if history repeats itself, and it most likely will, most people who get involved in property investment will not become financially independent.
Many will buy the wrong property or in the wrong location or not have a strategic plan or the right finance structures.
So my suggestion is to get a good team around you who have no properties to sell, but who can offer you independent, holistic investment advice – like the award-winning team at Metropole can.
Links and Resources
Get a bundle of eBooks and reports = www.PodcastBonus.com.au
Some of our favourite quotes from the show:
“As we know, this year’s hot spot is next year’s not spot.” – Michael Yardney
“In my mind, less than 4% of properties currently on the market are what I’d call investment grade.” –Michael Yardney
“On balance, it seems our economy is going to remain solid, but the growth is going to be slower.” –Michael Yardney
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