Five property lessons for 2011

To ensure you make the most out of our changing property markets as our booming markets are replaced by a period of slower price growth, I would like to share some important lessons I’ve learned from previous cycles.

Probably the most important lesson we can all learn is to 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.

Let’s look at five big lessons from previous cycles.

Lesson 1. Booms don’t last forever

During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn. Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.

Let’s face it… while the news is much less positive today, we know that over the next few years the flatter market conditions will be followed by another property boom and then another downturn. And over the next decade we’ll have another recession (we have one every seven to 10 years) and we’ll most likely have another depression one day.

The lesson from all this is get prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximised.

Lesson 2. Beware of Doomsayers

For as long as I have been investing, and that’s over 37 years, I remember hearing people with excuses why property prices will stop rising, or even worse, why property values will plummet. However in that time, well-located properties have doubled in value every eight to 10 years.

Fear is a very powerful emotion, and one that the media used to grab our attention. Sadly some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.

Lesson 3. Follow a system

Smart investors follow a system to take the emotion out of their decisions and ensure they don’t speculate. This may be boring, but it’s profitable. Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But many investors without a system found themselves in financial trouble when the market turned.

Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.” In other words, if you aren’t following a system that works in all market conditions you will be caught naked when the market changes.

If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring, so the rest of your life can be exciting.

Lesson 4. Get rich quick = Get poor quick

Real estate is a long-term investment, yet some investors chase the “fast money.” You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.

They are often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy. Their stories can be very compelling, even hard to resist. They often pander to the wishes of people who would like to give up their day job to get involved in property full-time, but in reality it takes most people many years to accumulate sufficient assets to do this.

Patience is an investment virtue. Warren Buffett said it right when he explained that: “Wealth is the transfer on money from the impatient to the patient.”

Lesson 5. It’s about the property

You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations. Instead they got sidetracked by glamorous finance or tax strategies and some lost out.

Smart investors do it differently. They make educated investment decisions based on research and buy a property below it’s intrinsic value, in an area that has above average long-term capital growth and then add value creating some extra capital growth.

These are just five of the many lessons that I learned from the recent property downturn.

We already know that in the last year or so the pendulum swung too far in some regions and the markets are catching their breath. We also know that if history repeats itself, some markets will swing too far into the negative, driven by fear.

If you learn these lessons from previous cycles the rollercoaster ride will not be as dramatic this time around because you won’t let your emotions drive your investment decisions. Remember both fear and greed will drive you down the wrong path.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.