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Everything you need to know about the 3 stages of property investing

Michael Yardney
·6-min read
3 steps to becoming a property investor. Source: Getty
3 steps to becoming a property investor. Source: Getty

We are at the beginning of a new property cycle.

In fact the beginning of the next property boom; a time when lifetime world will be created by small group of investors.

But if history repeats itself, and most likely will, most property investors won’t develop the financial freedom they are looking for.

Why do I say that?

Well, you just look at what happened during the previous property cycle, and the one before that, and the one before that.

Despite property values increasing over the last few decades, with the value of many properties doubling and doubling again, statistics show that around 50 per cent of those who got into property investment sold up in the first five years.

And of those investors who stayed in the market, 92 per cent never got past their first or second investment property.

And you can’t become financially free by only owning one or two investment properties.

So for an investor to make the most of this new property cycle must understand that property investment is a process.

It is a long-term journey made up of 3 stages.

However, most investors treat property investment like an event - they focus on the the here and now – the property purchase.

What tends to happen is they find a property they like, often close to where they live and buy that property thinking it will make a great investment because that’s what they would be happy living in.

Even worse, at present we are seeing FOMO (fear of missing out) creeping in with many investors lowering their selection criteria in order to get a foot on the property ladder.

Others are overextending their budgets and yet others are taking shortcuts just to get into the current fast moving market.

They’re in a hurry. They don’t realise that it takes most investors 20 to 30 years to develop financial freedom through property.

You see, the typical journey of successful property investors involves three phases or stages.

Stage 1. Learning what NOT to do.

The first stage is where property investors learn about investing.

They read blogs, watch videos and listen to podcasts exploring the many alternative points of view and eventually end up trying a number of different investment strategies.

The most common outcome is that they’re usually not much better off financially than when they started investing, even if they have been investing for years.

This stage can last 5-10 years, but eventually these investors realise that what they’re doing isn’t working.

Unfortunately some investors remain stuck at this level forever, either they’ve lost heart or they’ve lost money and can’t continue their investment journey.

Stage 2. Finding a winning formula.

A small group of investors move up to the next stage because they’ve taken the time to critically examine what has worked for them and what hasn’t.

At this point they have gathered a good team of independent professionals around them and developed enough wisdom to find a strategy that works for them.

They’ve also learned to stop listening to all the opinions on the internet and the white noise in the media.

These more successful investors formulate a strategic property plan which includes:

  • a proven system to choose investment grade properties, realising that these account for less than 4 per cent of all the properties currently available on the market.

  • a finance plan, to not only help then buy their first property, but the next and the next.

  • a structure and ownership plan to protect their assets and pass them on to future generations.

These investors have learned that residential real estate is a high growth, but relatively low yield investment so rather than invest for cash flow they buy well located investment grade properties to build their asset base over a number of property cycles.

While they recognise that it’s capital growth that will get them out of the rat race, investors at Stage 2 have learned the importance of cash flow management to see them through the ups and downs of the cycle.

Stage 3. Building a “cash machine.”

A very small percentage of investors ever make it to Stage 3 of the investment journey.

Once these strategic investors have built a substantial asset base, they slowly lower their loan to value ratio so that their property portfolio becomes a cash machine.

This is the stage where property investors not only realise they’re on a winning formula, but they recognise how to strategically use their resources efficiently and safely to head towards their financial objectives.

They are now more in control over their financial destiny.

Where do you fit in?

Statistics show that around 90 per cent of investors are at Stage 1.

Many remain stuck there for a long time, until they become aware enough to critically examine how their investments are performing, or they have someone else objectively help them review their past experiences.

Stage 2 investors make up most of the remaining 10 per cent, and are heading in the right direction, but would do much better if they could move themselves up to Stage 3, where their resources and capacity are allocated strategically without being influenced by the markets and other people’s opinion.

Stage 3 investors make up less than 1 per cent of all the property investors.

Why don’t most property investors move out of Stage 1?

I’d suggest that this is because often they are not even aware that they are stuck in Stage 1.

They know no better. They’re what I call financially illiterate and are subject to the cyclical ups and downs of the property market.

Stage 2 investors’ activities can still be subject to market movements but they are more financially savvy and have found a winning formula to grow their property portfolio.

On the other hand, that small group of property investors who make it to Stage 3 of their investment journey are what I called financially fluent.

They understand their way around the finance, tax and property markets and have built themselves a substantial asset base and a cash machine that gives them choices in life.

They are not as affected by the vagaries of the property in financial markets and go onto build lifetime and intergenerational wealth.

Where are you on your investment journey?

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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