It looks like we could be nearing the bottom of the property slump.
This has led to many mixed messages in the media and this together with uncertainty about our economy and jobs is causing a feeling of confusion for many investors.
But what is certain in these times of uncertainty is that some property investors will grow their wealth by taking advantage of the opportunity the market is presenting them.
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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 out looking for and buying investment opportunities created by the current buyers’ market.
Here are 11 time-tested rules that these successful investors use to make their fortunes.
1. Take a long term perspective
It is well documented that delayed gratification leads to a better financial position and a better lifestyle in general.
Warren Buffet put it well when he said: "Wealth is the transfer of money form the inpatient to the patient.”
Property investing has always been a long term game, and the longer your time frame and the better the quality of the asset you own the less important timing of the market becomes.
2. Invest, don’t speculate
Even though they think they are investing, many property investors are actually speculating.
The problem is they don’t recognise this.
You see, all investment comes with an element of risk, but in my mind it’s important to minimise your risks as in investor.
Yet the average investor buys their property emotionally, often near where they live, where they holiday or where they want to retire.
Then they hope that the market will appreciate.
Other look for the next hot spot, trying to time the market.
Both these types of investors are dependent on outside market conditions to produce a profit.
Smart investors do it differently.
They make educated investment decisions based on research, evidence and fundamentals.
They buy a property below its intrinsic value, in an area that has above average long term capital growth because of the more affluent demographic living there and then add value through renovations thereby “manufacturing” extra capital growth.
3. It’s about the property
Wise investors never forget the age-old fundamental of buying the best property they can afford in proven locations.
They don’t allow themselves to get side tracked by glamorous finance or tax strategies.
On the other hand those investors who are lured by rental guarantees, tax incentives or speculative off the plan one off profits are likely to miss out over the next few years
4. Property is a high growth low yield investment
While the argument about capital growth or cash flow investing will rage forever, sophisticated investors know the only way to eventually become financially free through property is to build a substantial asset base.
Sure cash flow is necessary - it helps pay the mortgage and keeps you in the game, but capital growth (having a substantial asset base) is the only way out of the rate race.
Savvy investors recognise there are 3 stages to their investment journey.
The asset growth stage - that's why they need to own properties that grow at wealth producing rates of return.
The transition stage - when they slowly lower their loan to value ratio
The stage where they live off their cash machine - the asset base of sound investment grade properties they've built over the years
5. Land appreciates
Smart investors buy properties with a high land to asset ratio.
That doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
And while it’s true that land appreciates in value, it’s not really as simple as that.
Not all land is made equal and not all land appreciates at the same rate.
There’s lots of land (ample supply) in the outer suburbs of our cities but much of the demand there comes from a small segment of the market - first home buyers (restricted demand).
This keeps a lid on capital growth and makes these areas poor investment prospects.
Even worse…the land component, the bit that appreciates, usually usually makes up less half of the total value of the property (in other words a low land to asset ratio.)
However in the inner suburbs the proportion of the land value to the total property price is usually considerably higher.
Remember it’s the scarcity of land that causes property values in these locations to keep rising and currently there is strong demand from a wide range of owner occupiers for properties in our inner suburbs.
This trend is likely to continue as more of us choose trade space for place and chose to live close to our workplaces in locations that offer better access to infrastructure like public transport, shopping and entertainment facilities.
As demand looks set to outstrip supply in the middle ring suburbs of our capital for many years to come, these areas are where successful investors will buy for long term capital growth.
6. Buy properties that will be in continuous strong demand
Of course not every property in a given suburb will make a good investment or have similar capital growth.
Savvy investors understand that investment grade properties are the type that will appeal to a wide range of owner-occupiers, since they make up the vast majority of buyers.
That’s why they avoid studios, student accommodation, holiday accommodation and serviced apartments.
After all it’s owner-occupiers, not tenant or investor demand, that push up property values in the long term.
And this will be particularly important in the next few years as the percentage of investors in the market is likely to diminish
7. Demographics hold the key
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.
Today there are more one and two people households.
We are getting married later, divorcing more often and living longer.
And many of migrants coming to Australia are happy to live in apartments.
This means more of us are looking for secure, medium density apartments and townhouses which will become the preferred style of living for as we swap our back yards for balconies and courtyards.
8. Surround yourself with a great team
If you are the smartest person in your team you’re in trouble.
Successful investors surround themselves with a team of top consultants and know how to discern an advisor, someone who is independent, from a salesperson.
In fact they are prepared to pay for advice recognising that if the advice they receive is free, they are likely to be the product.
9. Real estate investing is a game of finance with some properties thrown in the middle
Those investors who will flourish in the next few years will have set up financial buffers (in offset accounts or lines of credit) to help them ride the property cycles.
10. Understand where the risk really lies
Most investors believe there is a direct relationship between risk and reward - the higher the reward the more the risk must be.
But that’s not really true.
While most investors think the risk lies in the property or the markets or factors outside their control, the biggest investment risk actually lies with the investor – their knowledge, their experience and their mindset.
The best defence is a good offence.
Wise investors educate themselves and develop a level of financial fluency to make their investment journey as safe as houses.
Interestingly most successful investors don’t diversify.
They specialise by becoming good at one thing, or an expert in one area or niche, thereby getting great results.
11. The property market moves in cycles
During a boom everyone is an optimist and expects the good times to last forever, just as we lose our confidence during a downturn.
Truth is…our property market behaves cyclically, and each boom sets us up for the next downturn, just as each downturn paved the way for the next boom.
Just as it is doing right now.
Hmm…something to think about.
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.
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