In life, as in investing, you must always be prepare for the worst while hoping for the best.
In other words, maximise your upside while, at the same time, covering your downside.
Here’s a transcript of the interview:
Kevin: There are some interesting times ahead for property investors, aren’t there Michael?
Michael: Yes and my suggestion is that we have to design our property portfolio that can weather the inevitable storms that are going to come over the next years.
Kevin: It is a bit of a journey rather than a destination, isn’t it?
Michael: To build your wealth to get to financial freedom, takes a minimum of 15 years, and for many, even longer for most investors,.
During that time, you’re going to be working through a couple of property cycles, some periods of high interest rate times, some low interest rate times, some times when the property market is flat and a boom or two..
The question is, how do you weather it?
What do you do?
How do you protect yourself?
Kevin: So how do you prepare?
Michael: It starts off with the correct asset selection.
You have to have the properties that are strong – in other words, they keep growing in value – but also that are stable – they’re not going to fluctuate in value as much.
This means you have to invest in the big capital cities because that’s where they’re underpinned by multiple pillars of economic support, and have the sort of property that appeals to a wide demographic, particularly of owner occupiers, because they keep buying things as the market keeps moving up and down.
Kevin: How important is it to diversify your portfolio?
Michael: It’s very important, as you build your portfolio, to protect yourself by having properties in various states, because each state is in a different stage of the cycle.
There will be some times when you’re thankful that your proeprty is not in your home state because it’s in an area where property values are increasing, meaning you can go back to the bank and revalue those while leaving others alone.
Kevin: It’s pretty important, too, when we’re considering this, to think about where you stand financially – in other words, not over-committing yourself.
Michael: During boom times, it’s so easy to get carried away, borrow to the max, raise your loan-to-value ratios, not leave yourself with a buffer, but that’s when people get caught short.
It happens every time near the end of the property cycle, when people are trying to do one more deal or just get in before the end, and you never know when that’s going to be.
The lesson: Don’t speculate, stick to tried and true strategies, and leave yourself with a bit of a financial buffer.
Kevin: You would need to spend some time making sure that you have that buffer and that you buy well is that correct?
Michael: Yes property investment is a game of finance – youou buy yourself not only a great property, but a financial buffer means you can buy yourself time.
This allows you to ride out the periods when you don’t have to go back to the bank for a while and say, “Please, can you revalue my portfolio.”
You ride out the periods where the interest rates may go up or vacancies may be a bit longer, because those investors who can see themselves through from one period of the cycle to the next are the ones who are going to do well.
The other big benefit of the buffer is you’re going to have some money available to hop into the market when the inevitable downturn occurs, and you’ll be able to get what seems like a bargain at the time when other people aren’t ready.
Kevin: I really enjoyed my time at the Wealth Retreat on the Gold Coast recently, and one of the things that I learned from talking to the great number of people who were there is that they have a plan but they actually work on it.
They’re very, very proactive with their strategy.
Michael: They’re thinking in advance, they’re thinking ahead, and that’s what we’re talking about.
Look forward to the upside, but prepare for the downside, because I read many years ago that King Solomon had inscribed in his ring the words “This too shall pass” to remind him not to be too overconfident when things were flourishing and not to be too despondent when things were bad.
Kevin: You have to concentrate on not being negative but understanding that tough times do come.
Michael: That’s what Warren Buffett said: “Be fearful when others are greedy and be greedy when others are fearful.”
The tough times are good times if you’re prepared.
Kevin: Thank you, Michael.
Michael: My pleasure, Kevin.
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