04 Oct Time tested rules for investing – Michael Yardney
While many Australians will sit on the sidelines waiting for someone to ring the bell heralding the property market has bottomed, savvy investors will be out looking for and buying investment opportunities created by the current buyers’ market. While many unsuccessful property investors speculate emotionally, the successful investors use research and education to get their investments right.
Michael Yardney gives us some of the time tested rules these successful investors use to make their fortunes.
Kevin: In any market, there are always great opportunities. Many unsuccessful property investors speculate emotionally, and we’ve talked about that on the show before, but the successful, strategic investors use research and education to get their investments right.
Now, I did say at the outset that in any market, you can always make money, but there are some rules for successful property investing. We’re going to run through them with you now, along with Michael Yardney from Metropole Property Strategists.
Michael: Hello, Kevin.
Kevin: I know there are ten simple rules that you’ve documented for us today. Let’s go through them. The first one you say is they invest, they don’t speculate, which I touched on there in the introduction.
Michael: Yes, you did. So rather than buying emotionally, like you said, or saying “That’s going to happen, because that area hasn’t grown for a long time; it’s about to,” or buying emotionally like where they want a holiday or where they want to retire, smart investors do it differently. They make educated investment decisions based on research, buying a property below its intrinsic value, one in an area where the demographics are going to drive capital growth, and where there are other growth drivers, as well.
Kevin: You say in number two that it’s about the property, not so much about the attack strategy, Michael.
Michael: That’s right. A lot of people get caught up with “I’m going to get some depreciation, or I’m going to get a rental guarantee or tax benefits or negative gearing,” but at the end of the financial year, you always hear people coming quickly to us and saying “I have to buy property before the end of the financial year, because I need some negative gearing.” No, Kevin, it’s about property; you’re right.
Kevin: Number three is it’s all about high-growth, low-yield investment.
Michael: In my mind, residential real estate is a high-growth, relatively low-yield investment. I know there’s an argument for cash flow, and we’ve discussed this before, but in my mind, savvy investors know that the fastest way to build a substantial property portfolio is through the capital growth rather than through a couple of dollars a week cash flow.
Kevin: Land appreciates.
Michael: Yes, that’s right. That’s one of the rules successful investors use. They know that the majority of the heavy lifting for the property investment is going to be the location. 80% will be the location, maybe 20% or 25% will be the property itself within that location. But not all land appreciates equally, so they also recognize that they want to buy land in the right areas, areas where there’s strong demand and minimal supply.
Even if it’s just an eighth of a block of land under a block of apartments, they recognize that they just need a high land-to asset-ratio, rather than in the regional areas where the land component, while it could be physically big, money-wise, financially it’s not that big of a proportion of their investment.
Kevin: And in tandem with that, number five, you say – and you just touched on that – is about strong demand. They buy properties that will be in continuous strong demand.
Michael: Certain properties and certain locations are going to be preferred as we move forward, and so not every property is what I call investment-grade. You can always make it an investment; all you do is you kick the landlord, the owner out and put a tenant in, but that doesn’t make it investment grade.
You want one that’s going to be in strong demand, in my mind by owner-occupiers, because they’re the ones who will push up property values around it, and also you want the sort of property that tenants are going to want to live in so that your vacancies are short.
Kevin: Yes, and that probably takes us into point number six – doesn’t it – about the demographics.
Michael: That’s right. In my mind, it’s the long term demographic trends – how people want to live, where people want to live – that are going to determine the type of property that will be in demand in the future. As our cities mature and as we have an older population and more one-and two-people households, I think secure, medium-density apartments and townhouses will become more of a preferred style of accommodation, as many of us swap our back yards for balconies.
Kevin: Number seven is one that I’ve seen you demonstrate so well over the years, Michael – I’ve known you for a number of years now – and that is the team that you build up around you.
Michael: We’re talking about the ten rules of successful property investment, and one of them is that you do need to be part of a team. You have heard me say before that if you’re the smartest person in your team, you’re in trouble.
Successful investors surround themselves with a good team, but they also know how to discern an advisor who’s independent from a salesperson, where sometimes you get caught out thinking this person’s working for you when in fact, they’re not.
Kevin: Risk and reward, Michael?
Michael: Successful investors understand where the risk lies. There are some risks you can protect yourself against, and there are others that are out of your control. We really can’t control the market, we can’t control the political system, we can’t control whether the government is going to change negative gearing rule or superannuation, but you can be prepared for things like that by having financial buffers in place and by owning the right properties.
One of the biggest risks smart investors recognize is it actually lies within themselves: the way they think, maybe what they choose not to do by procrastinating – they know that’s a mistake. So risk is external and also internal, Kevin.
Kevin: And the final one – and you and I have talked about this on many occasions; it’s a subject we can divide an entire interview to – is that the property market definitely moves in cycles.
Michael: That’s right, and so do investor emotions. During a boom, everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn. Of course, the truth is that property markets do behave cyclically, and each boom sets itself up for the next downturn – and they’re the sort of conditions we’re heading into currently – but similarly, each downturn paves the way for the next boom.
I think one really just has to make the most of the opportunities and recognize that every year, something going to come out of the blue despite all your best homework, all your best research. There will be an X factor, sometimes on the upside – like this continuing lower interest rate environment and the long cycle we’re in – or sometimes on the downside like some of the economic, political, and finance changes that are affecting us, as well.
Kevin: Indeed. Michael, thank you so much for your time, great talking to you. We’ll catch you again next week.
Michael: Thanks, Kevin.