The four most dangerous words in property investment

Today I would like to share a memory from when I was still a novice investor.

 One of my early mentors taught me that the four most dangerous words a property investor could say was… “This time it’s different.”

 Unfortunately I ignored his advice in my early days of investing to my detriment, as I found that history does, in fact, repeat itself.

 The best way to explain what I’m on about is to look back over the last few years, as while many of our property markets boomed, two extreme opinions came out.

 Just trawl the internet and you’ll see there are two differing views about what’s ahead for property:

1. One group has been suggesting we are in for a long-term property boom and
2. Another was suggesting the property markets are going to implode.

In my view the extremists, in both directions, will be wrong

Why?

Because history does repeat itself and having invested (some would say reasonably successfully) for 40 years, I’ve learned some lessons.

Probably the most important lesson I have learnt 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 me explain this in more detail by looking at five big lessons I’ve learned over the years:

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 markets behave cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.

At some time over the next few years the buoyant market conditions we’ve enjoyed, especially in the Sydney and Melbourne property markets, will be followed by a downturn which will pave the way for the next upturn which will lead to the next boom.

Going forward over the next decade we’re likely to have another recession, but I’m not sure when since it’s been quite a while since we’ve had one and we might even have another depression one day – because history repeats itself.

Just look at what’s happening in the world’s economies and to the stock markets over the last week or two if you want a reminder of how fast things can change.

The lesson from all this is that even as you take advantage of our strong real estate markets, 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 maximized.

Lesson 2. Beware of doomsayers.

As long as I have been investing, I remember hearing people with excuses why property values will plummet.

However, during that time well-located capital city properties have doubled in value every 10 years or so.

Sure home values languish at times and, of course, property prices fall a bit during the slump stage of the property cycle, but the value of well-located properties in our capital cities don’t “crash.” They’re underpinned by the large percentage of home owners that don’t jump ship when the market turns.

However, 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

Strategic 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 strong property market because the market covers up most mistakes:  A rising tide lifts all ships

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 with your pants down 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 proposition, yet some investors chase the “fast money.”

You’ve probably met people like that – they look for that one 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 and they usually 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 Buffet got this right when he explained that: “Wealth is the transfer of 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 side-tracked by chasing the next “hot spot” and got caught out when the mining boom faded.

Or they bought “cheap” properties in secondary locations or chased cash flow in regional areas and now they feel they’ve lost out as the property boom in our capital cities passed them by.

Strategic investors do it differently…

They make educated investment decisions based on research and buy a property below its intrinsic value, in an area that has experienced above average long-term capital growth and will continue to do so because of the demographics of the people living in the area.

Then these smart investors “manufacture” capital growth by adding value through renovations, refurbishment or redevelopment and hold on to their properties as a long-term investment.

These are just five of the many lessons that I have learned over the years.

What have you learned? Please leave your comments below.

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. Subscribe to his Property Update blog.