Time tested rules for investing | Michael Yardney [Podcast]

While many Australians will sit on the sidelines waiting for someone to ring the bell heralding the property market has bottomed, savvy investors will be outProperty-Investment-Checklist-300x199 looking for and buying investment opportunities created by the current property market.

Unsuccessful property investors speculate emotionally, successful investors use research and education to get their investments right.

In a recent Real Estate Talk show Michael Yardney from Metropole Property Strategists gives us some of the time tested rules these successful investors use to make their fortunes.

Here’s a transcript of the interview:

(Alternatively you can listen to the short podcast at the top)

Kevin:  I know you’ve written ten simple rules for property invetsment, let’s go through them. Michael Yardney

The first one is they invest, they don’t speculate.

Michael:  Yes strategic property investors don’t speculate.

So rather than buying emotionally, or saying “Property values are going to rise, because that area hasn’t seen growth for a long time; it’s about to,” or  rather than buying emotionally where they want a holiday or where they want to retire; smart investors do it differently.

They make educated investment decisions based on research, buying a property below its intrinsic value,  in an area where the demographics are going to drive capital growth and where there are multiple growth drivers.

Kevin: Number two is that it’s about the property, not so much about the tax or other side issues.

Michael: A lot of people get caught up with “I’m going to get some depreciation, or I’m going to get a rental guarantee or tax benefits or negative gearing.”

At the end of every financial year, we see people coming to us at Metropole saying things like “I have to buy property before the end of the financial year, because I need some negative gearing.”

They forget that it’s  really all about property.

Kevin:  Number three is it’s all about capital growth.

Michael:  Yes – residential real estate is a high-growth, relatively low-yield investment.

There’s an argument for cash flow, and we’ve discussed this before, but savvy investors know that the fastest way to build a substantial property portfolio is through the capital growth rather than through a couple of dollars a week in cash flow.property investment

Kevin:  The next rule is: Land appreciates.

Michael:  That’s one of the rules successful investors understand.

They know that the majority of the heavy lifting for the property investment is going to be the location.

80%  of the performance of their investment property will be  due to its location,  end around 20% will be  due to the property itself in that location.

But not all land appreciates equally, so they also recognize that they need to buy land in the right areas, areas where there’s strong demand and minimal supply.

Even if it’s just an eighth of a block of land under a block of apartments, they recognise that they just need a high land-to asset-ratio, rather than buying in the regional areas where the land component, while it could be physically big, money-wise it’s not that big of a proportion of their investment.

Kevin:  The fifth rule is to buy properties that will be in continuous strong demand.

Michael:  Certain properties and certain locations are going to be preferred as we move forward, and so not every property is what I call investment-grade. 

You can basically make any property an investment; all you do is you kick the owner out and put a tenant in, but that doesn’t make it “investment grade.”

You need to own the type of property that will be in strong demand in the future by owner-occupiers, because they’re the ones who will push up property values around it.

And, of course, you want the type of property that tenants will find attractive so that your vacancies are short.

Kevin:  You’re sixth rule is to Understand The Importance Of Demographics.

Michael:  It’s the long term demographic trends – how people want to live, where people want to live – that are going to determine the type of property that will be in demand in the future.

As our cities mature and as we have an older population with more one-and two-people households – secure, medium-density apartments and townhouses will become more of a preferred style of accommodation, as many of us swap our back yards for balconies.

Kevin:  Rule number seven is build a great team around you.puzzle team

Michael:  We’re talking about the ten rules of successful property investment, and one of them is that you do need to be part of a team.

If you’re the smartest person in your team, you’re in trouble.

Successful investors surround themselves with a good team, but they also know how to discern an advisor – someone who’s independent – from a salesperson.

Yet some beginning investors get caught out thinking the salesperson is working for them when in fact, they’re not.

Kevin: Rule number eight is Understand The Risks.

Michael:  Yes…successful investors understand where the risk lies.

There are some risks you can protect yourself against, and there are others that are out of your control.

We really can’t control the market, we can’t control the political system, we can’t control whether the government is going to change negative gearing rule or superannuation, but you can be prepared for things like that by having financial buffers in place and by owning the right properties.

One of the biggest risks smart investors recognize is it actually lies within themselves: the way they think, maybe what they choose not to do by procrastinating – they know that’s a mistake.

So risk is external and also internal.

Kevin:  And the final rule – the property market moves in cycles.

Michael:  That’s right, and so do investor emotions. bank-savings-house-couple-save-property-meeting-budget-300x199

During a boom, everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn.

Of course, the truth is that property markets do behave cyclically, and each boom sets itself up for the next downturn – and they’re the sort of conditions we’re heading into currently – but similarly, each downturn paves the way for the next boom.

One really just has to make the most of the opportunities and recognize that every year, something is going to come out of the blue despite all your best homework, all your best research.

There will be an X factor, sometimes on the upside – like this continuing lower interest rate environment and the long cycle we’re in – or sometimes on the downside like some of the economic, political, and finance changes that are affecting us, as well.

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