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What type of property investor are you?
When speaking to property investors they all tell me much the same thing...
They bought their properties because they want to develop a degree of financial freedom.
Some are looking to quit their jobs, others just want to have the choice of whether they work or not.
Some are trying to save for their retirement while others want to leave something for their children.
Despite the great Australian dream of financial independence being alive and well, the problem is...
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Most property investors never achieve the financial independence they strive for.
With around 1.8 million property investors in Australia less than 1% of them own more than six properties.
And you can't really become financially independent just owning one or two properties.
On the other hand a small group of investors manage to build substantial property portfolios - interestingly we tend to see a disproportionate number of these as clients of Metropole.
Over the years I've found that investors tend to fall into one of three main categories, which led me to try and see if one style of investing was more successful than others.
So let's look at the three main types of property investor.
As you read on see if you can work out which category you fall into.
1. Firstly there is the Passive Investor who tends to spend little time looking for a property.
They are not really interested in understanding all of the ins and outs that go along with creating a property portfolio such as finance, tax laws, compounding and so forth.
Rather than conducting any due diligence or consulting industry professionals for advice, they're more likely to buy one of the first properties they come across.
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2. The more Active Investor puts in some degree of work in order to find a good investment prospect.
They gain a basic understanding of the principles involved in property, finance and taxation.
They also tend to seek professional advice with regards to the structuring of their portfolio and conduct some due diligence in the hope that they can increase the likelihood of making a viable investment purchase.
3. Finally there's the Analytical Investor who tends to run around for months, sometimes even years, examining every nook and cranny of our property markets, endlessly comparing values and sales, reading reams of material regarding real estate do's and don'ts and seeking advice from as many experts as possible before committing to anything.
They like to conduct as much due diligence as possible and look for the 'ultimate' investment property.
So which is better?
If property investment was like many other things in life, then the more effort and energy you sink into property investing, the greater your rewards are likely to be.
In other words, the passive investor would enjoy smaller gains than the active investor, while the analytical investor would come out on top as they were willing to do the hard yards.
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Yet, in relation to property investing this is only partially true!
Many passive investors purchase their investment properties the way they would buy their home – emotionally.
They tend to buy their investments near where they live, or near to where they work or close to where they want to retire or holiday – all emotional reasons.
Some live to regret their investment decisions and have difficulty holding on to their investments.
In fact many beginning investors sell their properties after a few years - stats show that around 50% of those who buy an investment property sell up in within 5 years.
Those that can hold on usually do well, but more of that later.
The active investor usually does well if he seeks advice from a team of consultants.
What about the analytical investor?
Let me share a story with you...
Last year I attended a Property Expo where I ran into Leonard - a successful IT Engineer.
He has subscribed to my newsletter for over 5 years and when I first met him about 3 years earlier he said he was going to invest in property.
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When I asked him how his investments were going, he explained that he had still not made a move.
Instead, he continued to research the market.
Leonard is very intelligent and has a tendency to over analyse things, hence he is still waiting for the perfect property, the perfect time or the perfect set of circumstances in which to buy.
What he doesn't realise is that this will never happen.
If he had invested in a good suburb in his home town of Melbourne 3 or 4 years ago, his property would have significantly increased in value - possibly by up to 50% if he'd chosen the right property in the right suburb.
He most likely would have done even better if he'd invested in a good property in the Sydney property market.
Instead he told me he has $500,000 sitting in the bank waiting for the 'right opportunity' to come along.
On the other hand, let's look at an example of a passive investor...
Let's call him Mark - who was so naïve that he bought the first property that he could get his hands on twenty years ago for $75,000.
At the time, his friends and family told Mark he was "crazy."
He paid way too much for the house, it was a bad time to buy and it was a foolish thing to do.
Although he may not have done all of his homework, Mark still bought in a popular inner Melbourne suburb and guess what?
The value of that home is now in the order of $600,000, and if he was half as smart, Mark would have borrowed against its increasing equity to allow him to buy more properties.
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The lesson from all this is...
It really doesn't matter too much if you're a passive, active or analytical investor.
As long as you are taking action and are in the market.
It doesn't really matter if you're not into running around examining every aspect of the property market.
Or maybe you are and that's not such a bad thing – as long as you don't get so absorbed by the process of learning about property that you forget to actually use that knowledge and buy something!
In other words, if you have been thinking about investing in property, now may be the right time for you to act!
Despite the mixed messages out there, there are still great opportunities in selected capital city property markets around Australia.
But you can't just buy any property like Mark did.
Of course you should still put some thought into what you buy.
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You can either buy right or buy well.
Often investors who take far too long researching the market and never make a move are looking to buy well.
They want to pay under market value for their investment and this becomes their sole focus.
Buying right on the other hand, is not really influenced by price and value, rather the focus is on the quality of the property you end up with.
Here you need to do a little bit of research to understand which markets generally offer the best opportunities for capital growth.
I don't find this hard – I can always beat the averages.
To ensure I buy a property that will outperform the market averages I use a 5 Stranded Strategic Approach.
I would buy a property that would appeal to owner occupiers. Not that I plan to sell my property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important in 2015 when the percentage of investors in the market is likely to diminish
I would buy a property below its intrinsic value – that’s why I avoid new and off the plan properties which come at a premium price.
In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. This will be an area where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes. In general these are the more affluent inner and middle ring suburbs of our big capital cities
I would look for a property with a twist – something unique, or special, different or scarce about the property, and finally
I would buy a property where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
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By following my 5 Stranded Strategic Approach, I minimise my risks and maximise my upside.
Each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour. If one strand lets me down, I have two or three others supporting my property’s performance.
And I definitely do not look for the next speculative "hot spot" - I'm an investor not a speculator.
But I do look for suburbs going through gentrification (improving in value as young people and developers move in and replace the old houses with refurbished homes or new developments.)
I also look for suburbs that will benefit from the "ripple effect" as strong growth in neighbouring suburbs trickles through.
So… what type of investor are you?
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.