04 Nov Where do investors go wrong? – Michael Yardney
In today’s show Michael Yardney, from Metropole Property Strategists, tells us the two things 90% of investors fail to do and as a consequence do not maximise the potential of their portfolio.
Kevin: I often wonder with about 1.7 million property investors in Australia why so few get past just one property. There has to be a reason for this, and I’m sure my next guest will know, Michael Yardney from Metropole Property Strategists.
Michael, where do investors go wrong? Why don’t they grow their portfolio this way?
Michael: I think those investors who fail do so because of the things they do, and successful investors are successful because of things they choose not to do.
Kevin: Well, you’ll have to explain that a bit more.
Michael: I think successful investors have formulated an investment strategy, so they don’t get carried away by all the fads and all the fashions and all the new fancy toys. That’s one reason. I think the other thing successful investors do is they regularly review their portfolio’s performance. They treat it like a business.
Kevin: I want to dig a little bit deeper into those two, Michael. Let’s deal with the first one – having a formula. I know that you have one. Can you take us through that?
Michael: Sure. My formula is basically relying on capital growth to build an asset base. Once you have an asset base, then what you do is slowly lower your loan-to-value ratios and live off your property. To choose those properties that are going to outperform the averages, we use a top-down approach to find the right states, the right locations, the right areas in those locations, and the right properties, Kevin.
To me, the right property is one that’s going to appeal to a wide range of owner-occupiers, because it’s owner-occupiers who push up property values of similar properties to make your property increase in value. I buy properties below their intrinsic value, so I don’t buy off the plan. I don’t buy new properties, Kevin.
Kevin, I buy in the areas that are going to outperform because I examine the demographics, the locations where people who have higher disposable incomes want to live. I like buying properties with a twist, something a bit unique, a bit different, a bit special, and I like buying properties where I can manufacture capital growth by doing renovations or by doing redevelopment – things like that, Kevin.
Kevin: So any property that you look at for your portfolio or anyone who you’re advising, Michael, they have to follow those five tests?
Michael: Well, the five-stranded approach means that I’m going to more likely outperform the market. If one or two of those strands doesn’t work, I still have two or three other strands to make sure that my property is going to be stable – it’s not going to go up and down in value much – and it’s going to grow significantly.
What that does is give us the maximum opportunity of getting the capital growth to get the equity to buy the next property, Kevin. That’s why most only stop at one, like you said. They don’t get the capital growth.
Kevin: Michael, I guess having an approach like that, sometimes you are going to get it wrong. That leads us into the second part of this, and that is reviewing your portfolio.
Michael: Yes. I think that’s another big mistake that those who don’t succeed do. They actually buy and set and forget. If they treated it like a business, they wouldn’t do that. I believe it’s important to annually look at how your portfolio is performing and ask yourself some questions.
Kevin: Let’s run through them. Can you give us an example?
Michael: What I do every year is I look at each property and say, “How has this property performed over the last few years?” I ask myself, “Knowing what I know now, would I buy this particular property again if it came on the market?” I ask myself, “Is this particular property likely to outperform the averages over the next decade?” Then I look to see if there’s anything I could or maybe should do to improve the property maybe to generate a better return on investment for me.
If a property hasn’t performed well over a three or four year period, Kevin, I have to consider is it the right thing to keep, or should I actually be selling it?
Kevin: Yes. Is there sometimes the wrong time to sell it, Michael?
Michael: That’s what people seem to think at the moment. They say, “Oh, look. I don’t want to do it now because I’m not getting the optimum price. I’ll wait for the regional areas to go up. I’ll wait for the mining towns to go up.”
But my feeling is that you shouldn’t do that because the gap between underperforming properties, Kevin, and the better performing properties is only going to widen, and it’s going to be very difficult to ever get into the market if you wait. I suggest you treat your properties like employees.
Kevin: I suppose you have to be pretty ruthless about them, don’t you?
Michael: Well, you’ve probably heard me say it before. You should treat it like a business. In this case, your properties are really your employees. Think about it. If your employees came late to work, Kevin, if they played on Twitter and Facebook all day, if they took a long lunch, and then they came back and weren’t in the mood to see the customers or the clients, what would you do, Kevin?
Kevin: Well, I’d terminate them, wouldn’t you?
Michael: Yes. Look, you’d probably do a performance review first, which is what we did. We asked those questions, and then you’d terminate them. You’d replace them. Kevin, sometimes you’d have to pay a redundancy package to move them on so that you could employ harder-working, better employees.
It’s really much the same with your properties. These are your employees in your real estate business, and they have to work for you in the long term. If your properties aren’t giving you what I call wealth-producing rates of return, you’re never going to achieve the financial freedom you want.
I hear too many people saying at the moment, “Oh, this property is really not costing me much to hold.” The problem is, Kevin, they’re not factoring in their lost opportunity cost. They may be cash flow neutral, it may not be costing them out of their pocket, but they’ve missed out the capital growth that some good properties have had, often $50,000 to $100,000 a year.
I think the lesson from all of this, Kevin, is you actually have to take a financial hit sometimes. Remember that redundancy package that you have to pay your employees just to allow you to move forward.
Kevin: Yes. Great advice. Michael Yardney, from Metropole Property Strategists, and his blog, of course, PropertyUpdate.com.au.
Michael, thanks for your time.
Michael: My pleasure, Kevin.