27 Jun Why property investors fail – Part 1 – Michael Yardney
Fifty percent of those who buy an investment property sell up in the first 5 years. Put another way – most Australians who get into property investment never achieve the financial freedom they aspire to, and worse still many property investors lose a heap of money and lost opportunities along the way. Michael Yardney shares some thoughts on how not to fall into that category.
Kevin: I sometimes wonder, what are the common investor concerns? What are the concerns that most investors have about the market and investing in property? So I asked Michael Yardney whether he could think back and talk to his team about what they see as those common investor concerns. What’s coming up time and time again?
Good day, Michael.
Michael: Hello Kevin.
Kevin: How did you go with the team? Did you put it together?
Michael: Yes, I did. Interestingly there were common concerns that when people came to us and said, “Look, I want to get involved in property,” common concerns they had, reasons why they hadn’t achieved the financial freedom that they wanted or gotten to where they had hoped to get to, considering that in our markets recently, property values have risen considerably, Kevin.
Kevin: I imagine there would be a bit of duplication in some of those, too, where they cross over lines. But you’ve actually been able to identify 11 core concerns; is that right?
Michael: Eleven common complaints people come and say, “Gee, I wish I knew that before.”
Kevin: Okay, let’s deal with them. We’ll deal with all 11 today in the show and we’ll break it into two parts, Michael. So let’s deal with the first five or six.
What was the first one?
Michael: Kevin, the first one was that they feel they’ve missed the recent property boom while they’ve seen others have managed to grow their property portfolio. In general, it was because of poor property selection. They owned the wrong properties. They didn’t get the sufficient capital growth.
Some bought off the plan and overpaid for their property; others bought in regional Australia where property values didn’t increase much – not as much as in the Big Smoke. I know there are some experts who recommended investing in regional Australia, but I’ve avoided those locations because we had more jobs growth, more employment, and more wages growth in the capital cities where there was a shortage of land, and that caused population growth and capital growth in property values.
Kevin: Great. What was the second one, Michael?
Michael: Many had concerns because they had difficulty holding onto their properties because they hadn’t organized their finance correctly, didn’t have a cash flow buffer in place, many of them because they were hoping to get a level of negative gearing but they couldn’t cover the shortfall.
A lesson from this is get your finances set up correctly. Cash flow is important, even if you’re investing for capital growth because cash flow keeps the wolves away from the door and keeps the banks happy.
Kevin: And line of credit, Michael?
Michael: Either a line of credit or an offset account. You really need to have some sort of financial rainy-day buffer, not just for a shortfall in your mortgages but also for all of those little things that go wrong and the unexpected expenses you have, Kevin.
Kevin: Yes. These are not necessarily in any order, Michael, are they? These are just the concerns as you see them.
Michael: No, they’re not. But interestingly, I think that the first two I mentioned – the poor property selection and the poor cash flow management – are really still among the most common issues that investors who haven’t done well have.
Kevin: And the third one for us?
Michael: A lot of them were concerned that maybe they bought the property in the wrong structure, they bought it in their own name, or maybe they should have bought it in a family trust or their self-managed super fund.
It’s important to begin with the end in mind. Therefore, if you are planning that in 10 or 15 years’ time when you retire you’re going to have a substantial portfolio, work back from then and understand what you would like it to look like then more than what it is that you need today because it’s too hard to change ownership structures down the track.
And that really involves sitting down with a property strategist and an accountant who can give you correct advice, Kevin.
Kevin: Yes, get the right people on your team.
What was the fourth one, Michael?
Michael: I found that people were concerned that they’d left their investment run too late. They were now approaching retirement age and suddenly they realized that they hadn’t built enough of a nest egg. The worrying reality is that for most Australian Baby Boomers, they believe they are going to run out of money and need the pension or need to be dependent upon the government, and we’re not sure that the pension is going to be there in the future.
Clearly, superannuation isn’t going to be enough for most Australians because most Baby Boomers nearing retirement didn’t have compulsory superannuation when they were young. So the concern really is “Gee, have I got enough time to still build a good enough cash machine?”
Kevin: Of course, many people sat on the sidelines, didn’t they? Does that lead us into the fifth one?
Michael: Life got in the way for a lot of people. They had their family, they had their kids, and they just didn’t think of investing.
The other one considers “Have I missed the boat?” They weren’t sure whether it was too late now considering that we’re at a more mature stage of the property cycle. I found that many investors didn’t invest because of information overload. Some were stuck with what we call analysis paralysis. They just didn’t know where to start or which way to go.
I guess my advice for those investors would be not to try too hard to time the property markets. Also remember that Australia is not just one property market; each state is at its own stage in its own property cycle. Sure, it’s a bit hard to work out where we are in the cycle with all the messages there, and again, that’s probably a good reason to get some good advisors on your side who have some “on the ground” knowledge in those property markets, Kevin.
Kevin: Michael, I think before we take a break, we have time for just one more, if we could.
Michael: A very common complaint we’re seeing is investors who have bought off the plan. This has caused concerns now because when they are coming to settle, sometimes they don’t have enough finance – the banks aren’t lending as much; they were hoping not to put any more down thinking that the value of their property would increase but it hasn’t. Others are finding that the properties aren’t valuing up for what their contract price was. Others were lured by various incentives.
In general, they would have been much better off buying an established property than a new or off the plan one, Kevin.
Kevin: Michael, that is six you’ve given us now. We have another five to go. We’ll come back later in the show and have a look at those with Michael Yardney.
Thanks, Michael. We’ll catch you later in the show.
Michael: Great. Look forward to it, Kevin.