27 Sep 4 most dangerous words in property investment – Michael Yardney
Kevin: I was attracted recently to one of Michael Yardney’s blogs on his blogsite, PropertyUpdate.com.au. It attracted me, and it probably did to you, too – “The Four Most Dangerous Words in Property Investment.” Well, it sucked me in, and they’re pretty good, too. I was laughing all the way through it, only because I’ve actually fallen into this trap.
Good day, Michael.
Michael: Hello, Kevin.
Kevin: Firstly, tell me what those four words are. I know what they are, but tell our listeners.
Michael: “This time, it’s different.” “This time, we have a low interest rate,” or “This time, the stock market crash isn’t going to affect us,” or “This time, the economy is not going to change things.” People would like it to be that way.
It’s some advice I learned early from one of my mentors, and I found to my detriment that I wasn’t paying any attention to it – thinking that this time it was going to be different. But you know what? History has a way of repeating itself, Kevin.
Kevin: It certainly does. There are some great hints about where we’re going to go just by looking at the past, Michael.
Michael: Very much so. While it’s not exactly a replica of the past, there are very many lessons you can learn from the past. Maybe we could go through a couple of those now.
Kevin: Yes, we would love to have some lessons. What are they?
Michael: The first one is booms don’t last forever. That’s actually pretty relevant for the moment. Everyone, during a boom, is optimistic and expects good times to last forever. That’s just the way our mind works, just as we lose our confidence during a downturn. But I learned the hard way many years ago, that property markets are cyclical. Each boom sets itself up for the next downturn, just as each downturn paves the way for the next boom.
I think over the next couple of years our buoyant markets are going to slow down, especially in Sydney and Melbourne where we have really gone a little bit too fast. Every upturn is followed by a downturn, which paves the way for the next upturn. I’ve found that most investors haven’t had their upside maximized, but they haven’t been prepared for the downside, either.
Kevin: Yes, so the lesson there, Michael?
Michael: The property market moves in cycles, and some markets work in different stages at different stages of the cycle. Each state is at a different stage, and within each state, there are multiple cycles, Kevin.
Kevin: Yes, and be prepared for the next phase.
Michael: Very much so.
Kevin: What’s lesson number two?
Michael: Beware of the doomsayers. Kevin, as long as I’ve been investing, I remember hearing excuses why property values are going to plummet, and they’re out there again today. But during those 40 years or so I’ve been investing, the price of well-located capital city properties have doubled about every ten years or so.
Sure, there have been periods when property values have languished, often for four, five, or six, years, and then they eventually catch up again, and it’s underpinned by the fact that in Australia, a large percentage of our homes have properties that are owned by owner-occupiers.
However, fear is a very powerful emotion, and currently, the media is using it to grab our attention. Sadly, some people have actually missed out on great opportunities to secure their own financial independence because they’ve listened to the message of those doomsayers, people who are wanting to deflate the financial dreams of their fellow Australians.
Kevin: I know of a couple of commentators, one in particular who we shall not name, but who actually believed the doomsayers. He went out and sold all of his properties and now would have to be regretting that he’s done it.
Michael: There have been a number of those. Kevin, you’re right.
Kevin: Yes. What’s lesson number three, Michael?
Michael: Well, to stop all of this emotion, I think the answer is to follow a system. Strategic investors follow a system that takes the emotion out of their decisions. I know it could be boring, but it’s actually profitable.
Let’s be honest. Almost anyone can make money during a strong property market because, as they say, a rising tide lifts all ships. But many investors without a system found themselves in financial trouble each time the market turned.
I remember Warren Buffett clearly saying, “You only find out who is swimming naked when the tide goes out.” I don’t want to even think about that, Kevin.
Kevin: No. It doesn’t bear thinking about.
Michael: In other words, what I’m saying is that if you aren’t following a system that works in all market conditions, you could be caught with your pants down when the market changes.
Kevin: What about those get-rich-quick schemes, Michael?
Michael: That’s another reason to have a strategy, Kevin. That’s a good point. Real estate is really a long-term proposition, yet some investors, I find, seem to be chasing the fast money. You have probably met the people, Kevin, yourself. They look for that one deal, that deal is going to make it all different for them. A year later, they’re still no better financially and they’re looking for another deal.
Patience is a virtue. Another great Warren Buffett saying is “Wealth is the transfer of money from the impatient to the patient.”
Kevin: Yes, and finally, Michael, lesson number five?
Michael: It’s about property. What you have to do if you’re in the property investment business is actually remember the fundamentals of well-located properties that are going to increase in value, rather than chasing the next hot spot or getting caught in the mining boom or getting caught in off-shore properties or options or land banking or other things.
Those who bought cheap properties in secondary locations or chased cash flows in regional areas over the last couple of years have actually missed out on the fantastic boom that capital cities have had.
Strategic investors make educated investment decisions based on research, and they buy a property below its intrinsic value and keep it in the long-term. They add value along the way. They manufacture capital growth by adding value.
Kevin, there are lots of other lessons, but I think if one pays attention to these ones, it’s going to see you through over the next couple of interesting years because it’s never going to be different, Kevin.
Kevin: Exactly right. Five great lessons there from Michael Yardney. You can read more about Michael, too, at his blog site, PropertyUpdate.com.au.
Michael, thanks for your time.
Michael: My pleasure, Kevin.