Today, I’m not holding back. I’m going to tell you some brutal truths about property investing.
You'll learn some of the things that can go wrong, you'll learn about the frustrations of being a property investor, and you’ll learn some of the ways in which slick marketing can lead you astray.
But stick with me - it's not all negative.
Also by Michael Yardney:
Understanding what could go wrong is one way of making sure things don’t go wrong and you can have the success a small group of property investors enjoy.
The problem is most people who get involved in property investment don’t develop the financial freedom they’re after.
Statistics show 50 per cent of new investors sell up in the first five years.
Most investors never get past their first or second property and only around 21,000 Australians own six properties or more.
In other words, less than 1 per cent of investors ever succeed in building a substantial property portfolio.
Now, this is not the type of information most people tell you about property when you first get started, is it?
That’s probably because many of the people you speak with - such as real estate agents or buyers’ agents - are trying to sell you something. Sometimes it’s a property, in other cases it’s their services.
So, this is my attempt to redress that balance a little bit and share 17 brutal truths about property that you don't often come across.
Despite what some people will tell you, property investment isn’t easy. But it is simple. Now, that isn’t a play on words.
What I’m trying to say is that if you do what most property investors do, you’ll get the same results as most property investors get — and that’s not pretty.
However, you’ll be heading in the right direction if you understand the following truths about real estate investing.
1. Property markets go through cycles
Over the long term, the value of well-located residential real estate increases but there are times every property cycle when values stagnate — sometimes for several years.
And there are short periods when the value of your properties will fall a little.
A-grade homes and investment-grade properties are less volatile. But at times even the value of these properties fall, occasionally for several years in a row.
2. You need a significant amount of money to invest
The truth is you do need money to invest in property, probably more than you think.
If you don’t have the financial discipline to save a deposit, then you shouldn’t be borrowing money to get involved in property.
3. It takes the average investor 30 years to become financially independent through property
While you can get rich through property investment over the long term, it is not a get-rich-quick scheme.
It takes most investors 30 years to develop financial freedom through property.
Interestingly, many investors waste the first 10 years making mistakes and learning what not to do.
The next few years are taken up selling underperforming assets and getting their financial house in order.
Then it takes two or three good property cycles to become wealthy through property.
Many of us think we are smarter than the experts and look for shortcuts but the only consistently certain shortcut I know is getting the right mentors early in your journey.
4. Saying ‘I'll be fearful when others are greedy, and I’ll be greedy when others are fearful’ is much easier than doing it
Most investors are overly optimistic during booms when they should be cautious, and most pessimistic during downturns when they are surrounded by opportunities.
5. No one really knows what the property market will do in the short term
While in the long term our markets are driven by fundamentals, in the short-term human emotion and crowd psychology play havoc with the best-laidforecasts.
6. Real estate investment is a game of finance with some properties thrown in the middle
Strategic property investors buy themselves time in the market by having financial buffers in place to see them through the ups and downs of the property cycle.
7. Property investment is meant to be boring
Make your investing boring so the rest of your life can be exciting.
If you’re looking for excitement, go bungee jumping or trail bike riding - don’t look for excitement in your property investing.
8. There is more free property information available today than ever before, but much of it is useless
Most market news is not only useless, but harmful to your financial health.
The most expensive advice you will get is free advice that‘s wrong.
9. Be careful who you listen to
Rather than listen to the get-rich-quick stories, it’s worth listening to those who talk about their mistakes and avoid the property spruikers who don’t — their mistakes are usually much bigger.
10. There is virtually no accountability for the many property gurus and their hot-spot predictions
I find it interesting that people who have been wrong about everything for years still draw large crowds of followers to their podcasts, videos and webinars looking for the next get-rich-quick scheme.
11. The more ‘comfortable’ an investment feels, the more likely you are to be taken by marketers or salespeople
I understand many beginning investors look for what they perceive as a security, but in general avoid rental guarantees or promises of certain returns. These usually come at quite some cost.
12. Despite what most would like to think, the biggest difference between ultra-successful property investors and the rest is not their property strategy or their investment ‘secrets’
Both groups only have access to the same investment vehicles – property, shares and businesses.
What makes the rich people more successful is the way they think - their “mindset” and their rich habits.
13. If you have credit card debt and are thinking about investing — stop
I suggest you become financially fluent before you start investing, otherwise the significant debt you’ll take on buying property will most likely overwhelm you.
14. Residential real estate is a high-growth, relatively low-yield investment
So, don’t buy real estate for cash flow.
Of course, cash flow is important to keep you in the game, but it’s capital growth that will get you out of the rat race.
15. Just because a property goes up in price doesn’t mean it’s a great investment
In 2021, we experienced a once-in-a-generation property boom that increased the value of almost all properties.
This was driven by historically low interest rates and pent-up demand, which eventually led to FOMO (fear of missing out), causing many investors to take shortcuts and buy secondary properties.
In my mind, just 5 per cent of properties on the market are investment grade.
The truth about investing, which investors must face, is that just because a property goes up in price does not make it a great investment.
The problem is when the market booms, as long as the prices goes up, we hardly ever question the rationale behind it.
We never ask ourselves: “Is the price rise justified by underlying fundamentals?”
As Warren Buffett wisely said: “A rising tide lifts all ships. But when the tide goes out you’ll see who’s swimming naked.”
16. There are 3 stages of your property investment journey
All successful investors go through the following three phases.
Firstly, there is the asset-accumulation stage, which requires leverage and owning high-growth properties.
Then, you slowly reduce your loan-to-value ratio.
That’s when you can eventually live off your “cash machine” of properties.
Of course, there is also the learning stage, which should come first, but many investors skip this.
17. However many properties you think you'll need to provide cash flow for your retirement, double it
Now you're closer to reality.
So, my advice for successful investing is to develop a strategic property plan for your investment journey.
Then plan for your plan not to go to plan, knowing that there will always be unexpected X factors coming out of the blue to test your resilience.
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.