Six lessons I’ve learned from past property cycles

I’m often asked what big lessons I’ve learned now that I’ve invested in property, and some would say successfully, for over 40 years.

Probably the most important lesson we can all learn is our property markets are not only driven by fundamentals but also by the often irrational and erratic behaviour of an unstable crowd of other investors.

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.

Here’s another six lessons I’ve learned about property cycles over the years.

Lesson 1: Booms don’t last forever, neither do busts

Don’t be surprised when they come around and don’t overreact. This will help you avoid being sucked into booms and spat out during busts.

During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn.

Yet 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.

And over the next decade or two we could even have a recession (we haven’t had one since the early 1990s) and we’ll most likely have another depression one day.

The lesson from all this is that even as you take advantage of our booming 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 maximised.

Lesson 2: Beware of doomsayers

As long as I have been investing I remember hearing people with excuses about 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 ten years.

Fear is a very powerful emotion and one that the media use 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 Buffet said it right when he explained: “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.

Strategic 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.

Lesson 6: Set up your finances to see you through the cycle

Recognise that property is a long term play and set up financial buffers to help you ride the property cycles.

If you heed these teachings, the rollercoaster ride will not be as dramatic next time round because you won’t let emotions drive your investment decisions; both fear and greed will drive you down the wrong path.

The bottom line

Cycles are an inevitable part of any investment market and our property markets are behaving normally when prices fall slightly or remain flat for a while.

This doesn’t mean that there are no opportunities out there for property investors – there are!

Remember there are local, as well as national, property cycles. Each state is in a different stage of its property cycle and the beginning of a new major property cycle has created some great buying opportunities for smart investors.

This is a time to be selective and to think long-term.

You don’t really have to pick the best time in the cycle

While I do like the concept of counter-cyclical investing, and it’s definitely important that investment timing is considered and sound, absolute precision-perfect timing is not really necessary with property investing.

In other words you don’t have to buy at the very lowest of lows or sell at the highest of highs.

Remember the absolute top and the absolute bottom are only two days out of an entire seven- to 10-year cycle and you just can’t pick them.

The financial wizards, the economists, the PhDs, usually can’t pick them either.

It doesn’t matter if the market has bottomed or not because you’re not buying the market.

You are buying an individual property in the market using my five Stranded Strategic Approach that will ensure your investment property will outperform the market.

When I started investing in property more than 40 years ago I knew nothing about property cycles. In fact I knew very little about property at all.

If I had waited until the right time of the cycle or the right market sentiment I might never have started at all.

Remember both fear and greed will drive you down the wrong path.

While it’s important to know where you are in the cycle, it’s also important to get going with your investment program!

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.