Seven Mistakes Property Investors Make
Look, I’m in this privileged position where I get to see a lot of property investors and the decisions that they made, not only in the last couple of years but quite often over a period of many many years. It’s not until you get the opportunity to look backwards and see the decisions that people make to see where you can fine tune and make some different decisions along the way. So, I’ve come out with some mistakes that I probably see investors make all the time which if you can get around this, would mean that you can make better decisions today moving forward.
The first one of those is the assumption that all property doubles in value every cycle. And if you just think about Melbourne for example, it’s done a little over 8%, compounding growth since the 70s, which we’ve got the data from the Valuer General. You can kind of think that if we can apply that to every property in Melbourne, chances are I would buy a property that would double in 9 years. The rule of 72 into 8 means a 9 year doubling cycle but unfortunately, you are not buying Melbourne. You are actually buying an individual property in a localised suburb in a localised street. We are a big fan of location doing the heavy lifting however within a certain suburb, there is variances and you can get some really strong performing properties in that suburb and down the road, two streets away in the corner, under the shade, you can get another property in the same suburb that doesn’t do as well. So there is this unshakable belief that people have that all properties will double in value is something that I see all the time, often from seeing a seminar being presented where the stats are put up in the screen and therefore people think, “Well, ok, all I need is put my name on the title and time will do the rest of the work for me”. I see that as being the biggest mistake, bar none where people thinks that all property will double in value because they won’t.
The second mistake I see is investors focusing on the interest that they pay through interest rates rather than the interest that they save over the term of the loan because for me I think that residential real estate investing is a game of finance. If you can get the finance side of things right, chances are the compounding, the leverage that come from investing in property can be quite straight forward but the amount of time when people can become very price sensitive, seeing through the microscope rather than the telescope about what interest rates am I paying, who can get me the best rate, for me is a moot point. It should ultimately be, what is the best loan structure that I can get to build a portfolio of property. That is no.1 and then no.2, what is the best interest rate that I can get because quite often, at face value, you might get a structure that looks like its more expensive but then when you count the cost over the term of the portfolio and the term of the loan, you are making heaps of saving, you’re controlling your cash and you are putting yourself in a very very strong position when it comes to lending.
The third one I see is not seeing property investing as a team sport. So for example, you’re playing, the obvious example, basketball, football, you are relying on your team mates to get the outcome that you’re looking for but quite often, people see it more like a game of tennis or a game of golf where you actually on your own.
If you actually think about that, even the world’s best golfers and world’s best tennis players, they still have a coach, they still have a caddie, they still have a team that helps them get the best our of their performance so ultimately, not even those guys are actually an island.
But when it comes to our own finances and our own property investing, quite often we want to huddle and stay in a corner and look after ourselves rather than bringing other professionals into the mix to help us get, ultimately, our outcome. So for me, property investing should be seen as a team sport. Yes, you may have to pay some fees, to get some of these people onto your team but let’s look at the bigger picture. The bigger outcome and the goal that we’re looking for and reverse engineer how much money you actually save by bringing people into your team rather than trying to go it alone and do it yourself.
I guess in looking back at lots of property portfolio another mistake I see is people confusing activity with accomplishment. So by that I mean, imagine if I’m just sitting down all day on a rocking chair and the moment I wake up to the moment I go to sleep, I rock all day. Now, I’m actually doing something all day. I’m actually exerting some energy and I’m not standing still but I’m going absolutely nowhere. I think that is quite often the case with property investing because the absence of having some meaningful end goal or outcome, they just decide that, “I’ve got to keep buying properties, I just got to be in the market and doing stuff” and as I say, confusing activity and accomplishment where some of the plan that we put together means that people have their principal place of residence and over the lifetime of a working period of 15 – 20 years, they might only buy 3 – 4 investment properties, one every 2 or 3 years until they’ve actually got it and then, look to retire the debt. Game over, job is done. So it’s important to understand, it’s not about getting 7 properties in 7 minutes, 22 properties in 22 months like you see on the front cover of the magazine. But more importantly, what do I want to get out of this and then be in the position to reverse engineer what that looks like and then just get on with getting on with life.
Another mistake I see is people operating on gut feeling rather than facts and its amazing how many times I see someone come to me and say, I’m going to buy this type of property in this area because I just feel that it is going to go up. Having known the science that goes behind property investing, because you got to remember, we are buying an asset that is highly emotional, its highly practical for most people, 70% live in it, 30% rent it or invest in it, so its a very very emotional asset. I guess the idea of, “Hmm.. I just got this good feeling about this area” is not quite enough because there is actually are some facts.We need to look at income, we need to look at scarcity, we need to look at owner occupier appeal. Some things that I talk about very regularly on these How to Sessions but ultimately, that sense of just doing something because they’ve got a feeling rather than putting some facts behind it for me, because again, I get to see the rear view mirror look at that and say, “Ok, you have a gut feeling back then but it hasn’t perform so well so ultimately that might not be the best way to invest in property”.
I remember the first time I went bungee jumping, I got up to the top of the stairs. It was about 70 meters up. I was looking down and it frightened the living day out of me and I remember having a bunch of mates down the bottom who are looking at me doing this jump and I’m thinking, all I want to do is walk back down those stairs and pretend I never turned up but ultimately, I jumped and I got this amazing adrenaline rush, touched the water, got back up, my friends were going, “Yeah! That’s awesome!”. I remember that feeling and its addictive and as soon as I finished the bungee jump, I wanted to go back up stairs and do another one despite the fact that I was so fearful before I done the first jump. I often worry about investors who are looking for that adrenaline feeling with property investing because to be honest, it should be really straight forward and really boring and predictable. I see it so often that people, may be a little disillusion with their job or what they’re doing and they kind of looking for their kicks at property investing where they get seduced by the next best thing, they want to renovate, they want to develop, despite the fact that they’ve got no experience in these areas and despite the fact that they are about to give up their weekend and probably not factor in an hourly rate for the things that they are doing. So I do worry when people want to get adrenaline out of property investing because it should be very very boring and very very straight forward.
And the last mistake that I often see people making is just because you live in a house and because you understand the mechanic of 7 or 10 years ago where you’ve bought a house to live in, it doesn’t necessary mean that you know how to invest in property because of all the 15,000+ suburbs and the millions and millions of dwellings in this country, you’ve got to have the ability to determine what is investing stock which is pretty much anything residential versus investment grade which is ultimately where you are going to get the performance for your property.
So I guess that’s just some lessons that I’ve learnt personally myself and also being in the position where, I talk to property investors and portfolio builders daily and I get a diverse range of looks at different portfolio to see the decisions that people have made so the conclusion is very very simple, property investing is a process, its not an event. So if you take some advice and take some of the things that I’ve just mentioned and see it as a team sport, get a few people involve that you trust who has got your best outcome in mind, ultimately, property investing can be really fruitful and rewarding experience to anyone who gives it a go.