What has Bungy Jumping got to do with Property Investing?

It was the summer of 93 and I’d just entered my first year at Uni ready to embrace the freedom of life ahead of me… one full of expectation, opportunity and adventure.  It was the year I turned 18 and a bunch of my mates had all pitched in to buy a bungy jump experience for my birthday.  We’d recently just come back from our schoolies week in Margaret River in the beautiful wine and surf region of Western Australia’s South West where we had broken the shackles of high school life and readied ourselves to embrace independent adulthood (in theory at least) for the first time.  I was ready to try anything and particularly anything new that had adventure attached to it!  After all, we had just graduated and wanted to throw ourselves into everything that life had to offer… the more adrenaline the better!

The anticipation on the day was incredible.  I was about to jump with my best mate and as we started the climb to the top to be strapped in and gently prodded south against every survival instinct in our bodies, the adrenalin rush was suddenly replaced with… FEAR!!  It suddenly dawned on me that I actually had to “jump” and to make matters worse there was a gathering of 25 friends on the ground that had come to witness it!  I’d hate to imagine if Facebook or Twitter was around back then as it’s not unreasonable to think that the majority of the Class of 92 might’ve turned up to spend their Saturday morning seeing if we actually survived!  As we approached the top I can remember thinking to myself “WHAT HAVE I AGREED TO?!”

On paper, it doesn’t seem that high but when you are standing at the top and the wind is howling (probably just blowing but everything seems amplified) and you can see for miles in any direction with the ground seeming “Everest” like away from where I was standing (yes, amplified here too), seventy metres suddenly took on new meaning.

As I looked over the edge, seeing the crowd below looking more like ants than people, I can remember thinking if they weren’t all down there, I would simply turn around, walk the 400+ steps back to the bottom and get out of there as fast as I could.  Clearly the ridicule attached to that was not an option so I eventually took the plunge, was subsequently dunked into the water below and left bouncing in mid-air after what was one of the most extreme adrenaline rushes I had ever experienced and importantly… thoroughly enjoyed!  I was so pumped that I decided to do it because the feeling you get afterwards is largely indescribable to anyone who hasn’t done it… you just feel alive!

Unfortunately, I’ve noticed that this is all too often the feeling people are chasing from their investments.  The adrenaline rush attached from buying low and selling high, from jumping from one strategy to the next based on what’s the latest marketing fad or perhaps the excitement that builds from a television show that captures all the high and lows of a couple chasing renovation glory.  But after 16 years in the property investment space advising clients on building portfolios of property and having myself in the past fallen victim to chasing the thrill of an investment opportunity I have now come to this very strong conclusion – make your life exciting and your investments boring!

Warren Buffet once said that removing emotions is one of the secrets to successful investing and my argument for a boring investment approach is to encourage investors to avoid becoming emotional in their decision making and rather focus on the long term strategy instead of focusing on the short term noise.  “Exciting” investing has the potential to become both risky and stressful.

Just like an award winning restaurant that delivers exquisite food time and time again the chef resists the temptation to deviate from the recipe as they know that to achieve the result they are looking for the key is in following the “process”.  I believe that the best laid investment strategy must also follow a set recipe and, like food, investing outcomes can be just as reliable as a result.

So what’s the property investment recipe?

I believe it comes down to 5 essential steps followed in exactly the right order.  I must warn you though – these steps, whilst they are a proven and trusted, are boring!  As when making beautiful food you can’t jump steps in the process, importantly, if you don’t follow the exact steps when investing chances are you won’t end up with what you had initially hoped for.

So what are these 5 essential steps?  Here’s a brief summary of each:

 

Step 1 – Clarify

When it comes to property investing, one of my pet hates is the one size fits all approach.  It’s a bit like going to the doctors and they write you a prescription and send you on your way without even asking you a “single questions” enquiring about your symptoms.  You’d really question their expertise at this point!  The same applies to investing – everyone is different and a thorough clarification of your personal situation is required and to be looked at in combination with your short, medium and long term financial and personal goals.

 

Step 2 – Evaluate

Once we know what we’re dealing with, the next step is to identify the opportunities, determine your strengths and look for strategies that avoid your weaknesses.  Using the doctor analogy, this is where the stethoscope comes out and an assessment is made on what needs to be considered as part of the overall plan, what specialists are likely to be needed and what plan should we design to achieve our aim.

 

Step 3 – Plan

A reliable blueprint or road map needs to be built so that your action has a destination in mind.  It’s essentially the rudder on the yacht that stops the boat from drifting aimlessly.  Sadly, this crucial step is often overlooked because it’s not easy to model and forecast.  But in reality, without it you don’t really know where your financial future is headed.  A reliable plan should model cash flow, debt, investment performance, equity as well as future provisioning/commitments. To combine all these, Empower Wealth has developed a purpose built proprietary ‘Wealth Simulator’ technology software. Please visit our Property Portfolio Plan page to learn more.

 

Step 4 – Implement

This is the place that most novice investors start – the doing!  They look online, put in their suburb and start finding out what they can afford to buy.  But I would suggest this focus is far too narrow! According to the ABS, there are over 9,100,000 dwellings in Australia growing by 2,500 per week with hundreds of sub-markets and many more markets within markets, so it begs the question “which property should you buy?”  There is a science and skill in finding the right opportunity and securing it in the best possible terms.   This is the place where experience comes into play and the art of asset selection can have a dramatic difference on the net worth results over time.

For example, what if you bought an investment property for $400,000 and it grew by an average 6% per annum compound growth – after 20 years that property would be worth $1.28m.  However, what if you were to find a $400,000 property that could get an average 8% per annum compound growth in the same period of time, then your property would be worth $1.86m which means an extra $580,000 to your net worth.  Certainly makes it critically important to get the asset selection right.

 

Step 5 – Manage

Do you know someone who has been meaning to get around to looking into investing or who bought one previously and had planned to buy again?

I can recall a client of mine who was on a good income who bought a property in 2004 with a plan to buy an additional investment property each and every year from then.  When I met her in 2010 I asked her the obvious question “how many do you have now?”  Based on her plan, I thought 4-6 properties would have been the answer.  She said only “one”!  After quizzing her further, she simply said that she just ‘didn’t get around to it’.

Sadly, this is consistent with many conversations I have with property investors around the country and perhaps it’s the reason why 73%* of all property investors stop at purchasing just one property!  But it doesn’t need to be this way.  By making a priority each year to conduct a portfolio review, you can measure what’s been achieved, benchmark it against your plan, monitor the effectiveness of the outcome and fine tune where necessary.

 

At Empower Wealth, we are not only confident in our uniquely formulated and tested 5 step process as we’ve applied to it hundreds of our clients, we’ve also ensured that we have the very best tacticians on board to implement the strategy. As a business that prides itself on being trusted and experienced specialists in our respective fields it’s critical that we have a process to follow and the five steps form the cornerstone of our advice to ensure that our clients build a wealthier tomorrow.

Remember, successful investing should be like watching paint dry or grass grow – it should be boring.  If you want adrenaline… go bungy jumping!

 

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