Two Things 90% Of Investors Fail To Do

Hi everyone. Today I found a great article in the Australian Property Investor that I know many of you will enjoy reading or possibly relate to. The original article can be found here https://www.apimagazine.com.au/2015/10/two-things-90-of-investors-fail-to-do/ - if you’d like to read the article there, or I’ve pasted parts of it here to share it. It’s well worth a read.

In my experience, the two big things most property investors fail to do are have a formulated property investment strategy and regularly review their property portfolio’s performance.

Looking at it this way, it should come as no surprise that most investors never get past owning one or two properties. If you don’t really know why you want to build a property portfolio or how it will one day get you out of the rat race, and if you don’t really know where you’re heading, how will you know which properties to buy? And how will you know if you’re on track and on target?

The trouble is, if you don’t know where you’re going, any road can get you there but any road can get you lost. And nowhere is this truer than property investing.

What are your goals?

How much money do you want your property portfolio to produce? How many properties will you need to achieve this? And what type of strategy are you going to follow – capital growth or cash flow or are you just going to leave it up to luck?

Currently there are more than 350,000 properties on the market in Australia, but not all of them will make good investments. In fact most won’t.

To ensure I only buy properties that outperform the market averages I use a “5 Stranded Strategic Approach”.

I would only 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 the current market, when the percentage of investors in the market is likely to diminish

I would only 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’d 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.

While most investors read a book or two, do a little research and then buy one of the first properties they come across, strategic investors are smarter than that. They follow a system that’s rooted in the real world and has managed to stand the test of time in changing markets.

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.

But it doesn’t end there. I also suggest you regularly review your property strategy. While most investors just buy a property and hold it for the long term, strategic investors regularly review their investment portfolio’s performance.

When I ask investors how their properties are performing, they usually have no idea. They’ve just closed their eyes, crossed their fingers and hoped for the best.

It makes no sense to invest in a property and then not review its performance every year or so. Some investors avoid the tough decisions and excuse their property’s poor performance by saying things like “it’ll turn around eventually” or “I don’t want to make a loss, so I’ll sell it when I can cover my costs”.

Some questions you should ask

Interestingly, every year I like to ask myself a few questions about each of my investment properties:

How has this property performed over the last few years?
Knowing what I know now, would I buy this particular property again?
Is this property likely to outperform the averages over the next decade?
Is there anything I could or should do to improve this property and generate a better return on investment for me?

Logically, if a property hasn’t performed well over a three- or four-year period, it’s likely to be a dud investment.

The answers to these questions help ensure that I only retain top performing properties in my portfolio and that my money’s working hard for me.

But isn’t it the wrong time to sell?

If, due to your financial capacity, you can only afford to hold five properties, you should aim to own the five best performing investment properties you can.

This means that if your property isn’t giving you the return you feel it should, then it might be time to make a change either through renovations, by changing property managers or by selling up and buying a better performing investment property.

Of course, it’s likely that if one of your properties is underperforming it’s in a location where the market’s flat and you may not get the optimal price today (in one of the regional centres, or an outer suburb maybe). But don’t wait till the market picks up because the gap between your underperforming property and better performing investments will only widen as the market moves and it will become harder and more expensive to buy the type of property you’d like to own.

Essentially the sooner you can identify and offload an underperforming property, the better. Sure you may crystalise a loss, or have to pay some capital gains tax on the sale and then pay stamp duty on your next purchase.

I understand this may mean that you’ll take two steps back to move three steps forward; but if you treat your property investments like a business, and that’s what all strategic investors do, you’ll recognise that it’s not how much money you make that matters; it’s how hard your money works for you and how much you keep that counts.

Treat your properties like your employees

You should treat your property investments like a business and, if that’s the case, your properties are your employees.

Think about it – if your employees came to work late, played on Twitter and Facebook all day, took a long lunch and when they came back weren’t in the mood to see your customers or clients, what would you do? You’d probably give a performance review, which are the questions I’ve just suggested you ask about each of your properties annually; and then you’d probably have two retrench them. Sometimes you’d even have to pay a redundancy package to move them on so that you could employ hard-working people.

It’s much the same with your properties. These are the employees in your real estate investment business and they have to work out for you long-term. If your properties aren’t giving you “wealth-producing rates of return”, you won’t achieve the financial freedom you desire.

I’ve heard too many investors say something like, “I know this property isn’t growing in value but it’s not costing me anything to hold it”. The problem is not factoring in the opportunity cost. Sure their property may be cash flow neutral, but what these investors (conveniently) forget is the $50,000-$100,000 capital gain they may have made if they owned a property in a better performing location.

The lesson is that sometimes you have to take a financial hit (that redundancy package) to allow you to move forward. This may mean crystallising a loss or paying agents selling commissions or even paying some capital gains tax. It’s sometimes hard to make these critical decisions – many investors are too emotionally involved with their properties and have difficulty evaluating their performance objectively. That’s why I recommend you have somebody to help you review your property portfolio annually.

There are lots of other mistakes you could make as an investor but if you adhere to a proven property investment strategy and regularly review the performance of your real estate portfolio, you’re likely to avoid the majority of blunders that other investors make.

This author seems to write some great stuff and well worth following.

If there is any other info you’d like me to search out and share in the world of Legal Services then please let me know. Or, if you have any other pressing needs in my area, feel free to reach out on (0295) 686 266 or visit www.cmlaw.com.au.


Thanks,

Alex