As usual at this time of year there are lots of predictions as to what will happen with our property markets. So what lessons can we learn from last year that will help property investors through the maze of conflicting forecasts for 2017.
Michael Yardney, CEO of Metropole Property Strategists shares 11 lessons he learned (or relearned) last year:
1. Don’t let emotions drive your investment decisions
Market sentiment is a key driver of property cycles and one of the reasons why our markets overreact, overshooting during booms and getting too depressed during slumps.
So never get too carried away when the market is booming or too disenchanted during property slumps.
Letting your emotions drive your investments is a sure-fire way to disaster because we tend to be most optimistic near the peak of the cycle, at a time when we should be the most cautious and we’re the most pessimistic when the media is full of the doom and gloom near the bottom of the cycle, when there is the least downside.
Yet market cycles mean each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.
The lesson is that even as you take advantage of our booming markets, get prepared for the next phase of the property cycle.
2. Take a long-term perspective
The property market moves in cycles and even though there are a few years of flat or falling property prices every decade, well located real estate has increased in value over the long term.
Imagine if you could buy the house your parents bought at the price they paid thirty or forty years ago; how many properties would you have bought then knowing what they would be worth today?
3. Property investment is a game of finance rather than real estate
This has never been truer than in the last few years as we experienced a credit squeeze with banks restricting finance to property investors as A.P.R.A. tightens credit extension.
Put simply: If you can’t get more finance you can’t buy more properties.
Smart investors use an investment savvy finance broker to help them through the maze of different lenders as well as only holding “investment grade” properties to ensure their borrowing capacity is being optimally utilised.
4. There is not one property market
While many people generalise about “the” property market there are many submarkets around Australia.
Each state is at a different stage of its property cycle and within each state the markets are segmented by geography, price points and type of property.
For example, the top end of the market will perform differently to the new homebuyers’ market or the investor segment or the median priced established property sector.
And it is likely that both the Sydney and Melbourne property markets will again outperform in 2017 driven by their strong economies, jobs growth and population growth.
5. Not all properties are “investment grade”
While there are currently around 250,000 properties for sale in Australia, most are not “investment grade” properties which:
- Appeal to a wide range of affluent owner occupiers.
- Have a level of scarcity.
- Are in the right location – one with strong prospects on long term capital growth.
- Have street appeal and offer security.
- Have a high land to asset ratio – this is different to a large amount of land. I’d rather own a sixth of a block of land under my apartment building in a good inner suburb, than a large block of land in regional Australia.
- Have the potential to add value through renovations.
6. Follow a system
Almost anyone can make money during a property boom because the market covers up most mistakes.
But when the market turned, like at the end of the mining boom, or during the GFC, many investors without a system found themselves in trouble.
Strategic investors follow a system to take the emotion out of their decisions and ensure they don’t speculate. This gives them consistent profits and reduce their risk.
7. Get rich quick = get poor quick
Real estate is a long-term investment yet some investors chase the “fast money.”
They’re often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy.
Warren Buffet said it right when he explained that: “Wealth is the transfer on money from the impatient to the patient.”
8. Beware of doomsayers predictions
Fear is a very powerful emotion that the media uses to grab our attention with messages, particularly from overseas “gurus”, of why property values will plummet.
While some people missed out on the opportunity to develop their financial independence because they listen to these messages, many ordinary Australians became millionaires by owning property.
9. Treat property investment like a business
Successful investors treat their investments like a business by surrounding themselves with a great team of advisors, getting the right finance, setting up the correct ownership and asset protection structures and knowing how to legally use the taxation system to their advantage.
10. There will always be a reason not to invest
Every year brings its own set of crises and lots of reasons not to invest. You can go back as far as you like in history and there won’t be a crisis free year.
Where investors get into trouble is that rather than focusing on their long term goals, they see these crises as once in a generation events that will alter the course of history, when in reality they are just the normal path of history.
11. You know less than you think you know
There is a nearly insurmountable amount of material to learn about in the fields of property, finance and economics. Always continue learning.
Author: Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog