It seems that everyone is an investment genius when the property markets are booming.
But when times get tough, it’s important to listen to those who have the perspective of having lived through a number of economic cycles and who take a holistic approach to wealth creation.
Yes we are living through difficult, unprecedented times but like all the disasters before COVID-19, I am confident that this, too, shall pass.
We have been through wars, terrorist attacks, inflation, stagflation, deflation, SARS, EBOLA, AIDS; the list goes on.
Through it all, people suffered and businesses went broke, but as a society, we always pulled through.
This time should not be different.
Lately I have been asked by clients and the media what rules do I apply in trouble times like this.
I start by explaining that while I’m financially independent, I intend to remain active in the property investment markets which means I recognise that I will experience several more significant market downturns and several more property booms.
I invest for the long-term and don’t get thrown off by either the good all the bad phases of the property cycle, because I know they are part of the economic cycle and I recognise that while the ups and downs are short-term; the long-term trend for well-located residential real estate is up.
It’s been that way since Federation, and is unlikely to change.
And because it’s easy to get caught up in the panic and drama of the moment, I’ve learnt to turn down the noise and be careful who I listen to.
In particular I’ve learned not to listen to the general media, because I know that the job of the media is not to educators, but to entertain us and entice us to click on their links with seductive click bait headlines.
If, like me, you’re also investing for the long term, here are 11 further rules to keep in mind and help you make it through to the other side.
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.
Along the way learn from proven mentors and get a good team around you, but make sure you have a thorough knowledge base, because while you can delegate or outsource many tasks, it’s critical to understand if you’re being given impartial advice or if you’re being taken advantage of by the many vested interests after your money.
Becoming financially fluent you will get invest rather than speculate.
One of the reasons most investors don’t develop the financial freedom they deserve is because they don’t understand the rules of money and they end up buying their properties with emotion.
Be it your first property or your next property, it should be part of a long term plan and a stepping stone to building a substantial portfolio.
The problem is most people buy their investments with emotion.
They’re looking for a property that they would be happy living in, or the buy in suburbs near where they live, or where they would like to holiday location or near where they plan to retire.
But, of course, property investment is different from buying your own home – you need a well thought out strategy with measurable goals.
By having a plan and a system to gauge the worth of an investment you will achieve better results.
But it can’t just be any old strategy…
2. Adopt a proven investment strategy
Remember 90% of property investors never get past the first or second investment property, so don’t follow the herd; don’t follow the strategy that most property investors follow.
Residential real estate is a high growth, relatively low yield investment, so I recommend a capital growth investment strategy.
While cash flow is important to keep you in the game, it’s capital growth that will get you out of the rat race, so first concentrate on building a substantial asset base over a number of property cycles, then slowly lower your loan to value ratios and eventually you’ll be able to live off your “Cash Machine.”
It’s too hard to become rich the other way around — from savings or cash flow.
In other words…wealth is created by building a substantial asset base and you achieve this by holding good investments for a reasonably long time, reinvesting your income and allowing your capital gains to build up.
3. Not every property is investment grade
While virtually any property can become an investment — just put a tenant in; few properties are “investment grade” and will strongly outperform the averages over the long term.
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.
4. Don’t believe the hype
Be careful who you listen to for advice.
There are some great independent advisors out there, but the market is flooded with developers, property marketers and Real Estate agents who don’t really have your best interests at heart.
In the excitement of buying a new property it can be easy overlook the fact that property doesn’t always go up.
Currently I’m seeing many new first home buyers take advantage of some of the government incentives like HomeBuilder thinking that the government has them in mind.
No it hasn’t!
This is a grant to help the building industry through the challenging times and to create jobs in the construction industry, yeah some first home buyers are purchasing homes in locations where there will be little if any capital growth and paying a price that will mean there financially over their heads.
Think about it…
If you gear into a property with a 5% deposit, the value needs only to go up by 5% for you to double your money; on the other hand, if it goes down by the same 5%, you’ve lost your equity.
5. Location does the heavy lifting
Location will do 80 % of the heavy lifting for your property’s performance and that’s why I only invest in certain suburbs of our three major capital cities.
Now I know there will always be people telling you to invest in regional Australia but why fight the big trends?
Most jobs, most wages growth, most population growth and most of our economy happens in Australia’s capital cities and in particular in our big 3 capital cities.
The inner and middle ring suburbs will always outperform with regards to capital growth and have done so over the last 40 years.
Interestingly it wasn’t always this way – at federation regional land was as valuable as capital city property, then we became an industrialised country and people moved to the city.
Now we no longer manufacture goods – it’s all about services – that’s where the higher paying jobs are and these people have more disposable income.
By the way…I’ve always recommended investing in locations where people have higher disposable incomes and are able to and prepared to pay a premium to live there.
These tend to be the more established suburbs in our big capital cities, and the surrounding gentrifying suburbs.
Not surprisingly these are the areas were properties are holding their values well during the current coronavirus pandemic.
I can hear some people thinking “Isn’t all the good land taken – isn’t it unaffordable to invest in the 3 big capital cities?”
Fact is, the way people are living is different today…
We’re trading space for place – trading back yards for balconies and courtyards to live in the inner and middle ring suburbs of our big capital cities, which means you don’t have to own a house. Townhouses, villa units and low rise established apartments in the right location make great investments.
I know there are people out there coming to invest in the new outer suburbs, but I’m not really convinced that land in Penrith or Point Cook or Toowoomba will ever be more valuable than land near the harbour.
Think about it – where would you live if money was no object?
6. 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.
Sure in the short-term out immigration will be slower, but over the long term understanding demographic trends will ensure you’re in the right property in the right location.
7. Real estate investing is a game of finance with some properties thrown in the middle
Cash flow management is critical to successful property investing.
And today more than ever having the right finance strategy is important.
This is little to do with low interest rates, and much more to do with having the correct finance product and setting aside financial buffers, not just to buy a property to buy you time to ride the ups and downs of the property cycle.
8. The economy and our property markets move in cycles
One of most significant trends I’ve seen over and over in the past almost 50 years of being a student of economics is that investment markets constantly go through cyclical phases of good times and bad.
However, 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.
Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
9. 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.
10. Don’t focus on bargains — they rarely have a future
In today’s informed market there are very few bargains.
Sure we are experiencing fewer property transactions because of the effects of coronavirus, but there is a flight to quality and buyers have become more discerning.
While it’s often said you make your money when you buy your property, and that’s true, it’s because you buy the right property not because you buy cheaply.
Getting your property $10 -$15,000 cheaper will be a one off bonus.
On the other hand buying a property with above average capital growth potential deliver recurring compounding benefits
Think about it…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.
11. 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 from abroad.
Just think back to Christmas time, who would have thought we would have been locked in our houses at Easter time.
Just think back to Easter, who would’ve thought there would be a second wave of coronavirus that locked up Victoria now.
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
If you’re wondering what will happen to property in 2020–2021 you are not alone.
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