As Australia’s real estate markets move into the next phase of the property cycle strategic investors are asking themselves: “what’s the right type of investment for the new financial era?”
After a number of years of exceptional house price appreciation, it looks like we’re in for a period of lower house price growth across the country underpinned by expectations of lower economic growth, lower inflation, lower interest rates and slower income growth.
So back to the original question – what’s going to be the best investment in the years ahead?
One thing is certain; there is no such thing as a perfect investment.
If somebody tells you they have found “the perfect investment” be very sceptical and ask lots of question, because chances are they’re trying to sell you something you just shouldn’t buy.
The things I look for in an investment are:
- strong, stable rates of capital appreciation;
- steady cash flow;
- liquidity (the ability to take my money out by either selling or borrowing against my investment);
- easy management;
- a hedge against inflation; and
- good tax benefits.
Examining the major categories of investments, you’ll recognise that not many fit the bill when it comes to all of these criteria.
To grow your wealth in the current uncertain economic environment you’re going to have to invest in assets that are both powerful and stable.
By powerful, I mean that they must have the ability to appreciate in value at wealth producing rates of growth.
This usually comes from the ability to borrow and leverage against them.
By stability, I mean your investment should grow in value steadily and surely without major fluctuations in value.
Many investments are powerful and many are stable, but only a few are both.
Prime residential real estate is one of the investment vehicles that has both power and stability in spades.
Now that doesn’t mean it’s perfect, because property is not as liquid as many other investment classes.
It can take months to get cash out of your portfolio if you sell a property.
Or you may be able to get funds a little quicker by refinancing against the increased value of your properties, but even this takes time to organise.
While some might see this relative lack of liquidity as an issue, I would argue that it is one of the virtues of property as an investment vehicle.
Because the only way for an investment to achieve liquidity is to relinquish some of its stability.
If it is liquid (easily sold, like shares) it is more likely to have wide, more volatile fluctuations in value.
Let’s examine this concept a little more closely by looking at the stock market.
The stock market is another potentially powerful investment vehicle because you can borrow against the shares you own.
But in order to achieve the liquidity the stock market provides you give up some stability.
Share prices are volatile, fluctuating up and down and then down and up again.
Sure you can get your money out quickly, but you also run a bigger risk of making a loss.
What about putting money into a savings account?
While this type of investment is both very liquid and pretty stable, it won’t give you a wealth producing rate of return.
If I had the choice, and I do, I’ll take stability (lack of big swings in price) over liquidity every time.
Over the last decade we’ve been troubled by a number of world economic crises, experienced both high and low interest rates, had a mining boom and then a bust and we’ve governed by five prime ministers,and during those last 10 years the properties in my real estate portfolio have more than doubled in value but have been relatively illiquid – it would have taken time to sell up.
However, over the same period, the value of many shares that were very liquid decreased in value by 30% or more.
I will stick with property any day.
When To vs How To investments.
Now I know that many advisers recommend ‘when-to’ investments, which means you have to know when to buy and when to sell.
The problem is that timing is crucial with these investments: if you buy low and sell high, you do well.
However, if you get your timing wrong, your money can be wiped out.
Shares, commodities and futures tend to be ‘when-to’ investments.
And so is chasing the next property “hot spot.”
I’d rather put my money into a ‘how-to’ investment such as established capital city real estate, which increases steadily in value and doesn’t have the wild variations in price, yet is still powerful enough to generate wealth producing rates of return through the benefits of leverage.
While timing is still important in ‘how-to’ investments, it’s nowhere near as important as how you buy them and how you add value.
‘How-to’ investments are rarely liquid, but produce real wealth.
Most ‘when-to’ investment vehicles produce only a handful of large winners but there tends to be many of losers.
On the other hand, investing in well located capital city residential real estate produces many wealthy people (both home owners and investors) and only a handful of losers.
What are you going to do to take advantage of this stage of the property cycle?
With so many mixed messages out there about what type of what makes a good property investment it’s hard to know who to listen to.
It’s hard to know who to trust.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level. Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
Just click on this link to find out more and reserve your place.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.