28 Feb Property investment 101 – Michael Yardney
If you’re looking to get into property or move up to the next rung of the property ladder, Michael Yardney has some words of advice. He calls it property investment 101 for rookies but it is much more than that.
Kevin: This show, of course, is all about helping you build a good strategy and build a good portfolio. But what happens if you want to move to the next level, if you’re uncomfortable with where you are now or even if you want to start? Let’s have a look at some property investment 101 advice for rookies. Michael Yardney joins me from Metropole Property Strategists.
Michael, I guess you come across this quite often where you’re very knowledgeable – as the rest of your team and you’re dealing with this all the time – but someone comes to you and just says, “Look, I just need some very basic advice.” What would you say to them, Michael?
Michael: Good question: where do you start? Because property investment is simple but it’s not easy and, Kevin, that’s really not a play on words. It’s not something you enter into lightly, but for some reason, that’s what a lot of people think they can do. They dream they can make millions of dollars with real estate and they just go off, and buy any house and they stick a tenant in and they think they’re going to make a killing.
It doesn’t work that way. The market’s been very brutal to a lot of investors recently, hasn’t it?
Kevin: It certainly has. What are some of the pieces of advice you would give, Michael?
Michael: I guess the first one is knowledge is power in property investment, so you need to understand what makes an investment grade property, because most properties aren’t. In my mind, in the current market, where there are over 250,000 properties for sale in Australia – which is actually a bit less than are normally on the market – there’s probably only about 2% of those that would in my mind fall into what I would call investment grade.
First of all, you have to recognize that you make your money in real estate four ways: You make it through capital growth – that helps you build a sound asset base. You make it through cash flow, which you need to help pay your mortgage. You make it through tax benefits. And the fourth way you make your money in property is through forced acceleration by manufacturing some capital growth through renovations and development.
Understand how property works. Step one, Kevin, would be to get a good understanding of property, finance, and a little bit about economics.
Kevin: So understanding the market and understanding, too, I guess, Michael, that it moves in cycles. You and I have talked about this on a number of occasions, haven’t we?
Michael: Definitely. The next step is understanding that there’s not one property market in Australia, and even in your own state, there are multiple markets defined by geography, defined by price points, defined by the sort of property, and that they are all at different stages of their own cycle.
While timing the market isn’t the be all and end all of it, it certainly helps to understand how the market moves and where your current market is in its own stage of the cycle so that you don’t get caught out as it turns.
Kevin: What about location? How important is that, Michael?
Michael: In my mind, the location does the majority of the heavy lifting of your investment. While it’s not exactly accurate, about 80% of the value of the property is in the growth of your property – the success of your investment is related to the location – and 20% is maybe that property within the location.
I look for demographics. I look for locations where people have higher disposable incomes and can afford to and are prepared to pay a premium to live there. In general, Kevin, these are the inner and middle ring, affluent suburbs of our big capital cities.
I also look for areas that are gentrifying, where the nature of the property is changing as well and more affluent people are moving in, because these people tend to spend money on their homes and improve the houses, therefore pulling up the value of other houses around them.
Yes, you’re right, Kevin; location is a critical component to the property game.
Kevin: I’ve heard you say, too, that property investment is really a game of finance. So money is pretty important, Michael – how you handle money and how you strategize around it?
Michael: Kevin, more so today than for many, many years. It always has been important, but if the banks will lend you more, you will then be able to buy more. So a well-rounded understanding of how to maximize your borrowing power by using equity and leverage to buy more properties is going to be important to you.
And just as important is understanding the power of having a facility like a line of credit or something like that as a cash flow buffer for when circumstances change.
Kevin: Michael, since we’re talking about money – we’ve talked about this – it’s relatively easy to make lots of money through property investment, yet many people still manage to lose it. Why is that?
Michael: Kevin, we’re not taught how to do money. You’re not coming out of the womb knowing how to do it. Therefore, we pick up bad money habits along the way and often from our parents and very much from our friends. The world and society is making it easier to do that with anyone able to get a credit card or a store card or interest-free for 24 months.
Yes, to become financially independent you have to become financially literate. You have to become financially fluent. More than literate, you have to be good at it. Managing money, budgeting, balancing the books – they’re basic things that you have to get to before you can even start managing a multi-million dollar property portfolio. But most people don’t know how to balance their credit card, Kevin.
Kevin: That’s right. Just sum it up for me, Michael. What would be the final words of advice or maybe the warning that you’d give to investors?
Michael: There are a couple of steps to it. First of all, formulate a plan. Understand what your end goals are, what you want to achieve, and then make decisions according to that.
Be cautious. Everyone’s happy to give you advice, but rather than listening to all these well-meaning friends, not everything that glistens is gold. Not everyone can be a property millionaire, so take things with a grain of salt, I guess.
Understand the difference between a salesperson and an advisor, because everyone’s going to be around wanting to give you advice when they suddenly hear that you’re interested in getting into property investment. Instead, be prepared to pay for advice. I find that good advice is never expensive; in fact, it’s much cheaper than learning from your mistakes.
And understanding what becomes a good investment property and not rushing off and buying the first thing you see and getting too excited by it all. Because property doesn’t discriminate; it doesn’t care who owns it. And even though we’re going to have some interesting times ahead this year, over the next 10 years, our property values are going to double again. They’re going to go up by billions and billions of dollars in Australia. They don’t care who owns it, so you may as well own part of it and get it right and have your share.
Kevin: Indeed. Great words of advice, Michael. Thank you so much for your time.
Michael Yardney from Metropole Property strategists. The blog for Michael – check it out for yourself. If you’re not already subscribed to it, you should be. It’s called PropertyUpdate.com.au.
Thanks for your time, Michael.
Michael: My pleasure, Kevin.