Manage episode 289377629 series 1537109
If you want to take advantage of our property markets and become financially independent, today’s show is for you, because I’ve got 3 segments during which I share a number of concepts that will help you along the way.
First, we discuss whether property investing is an art or a science.
Spoiler alert: it’s both. But you still need to listen to the balance of the show because I’m going to explain how and why they interact.
I’m also going to discuss the concept of becoming a borderless investor – investing in another state.
I know a lot of people find this difficult. I see this particularly among intelligent and analytical people because they want more control. But bear with me as I explain some of the benefits and why you should at least consider becoming a borderless investor.
Then in my mindset moment, I’m going to share a lesson that’s made a difference to how I structure my life and I’m going to talk about the big rocks in the jar of your life.
Is successful property investing an art or a science?
So, Let's look at the three types of property investor.
- The passive investor
A passive investor tends to spend little time doing any due diligence and is keen to buy one of the first properties they come across.
They aren’t really interested in understanding all of the ins and outs that go along with creating a property portfolio such as finance, tax laws, compounding and so forth.
Instead, a passive investor tends to let their emotions get involved in their investment decisions, which we know can lead to disastrous results.
- The active investor
An active investor puts in some degree of work in order to find a good investment prospect, including conducting some due diligence in the hope they can increase the likelihood of making a good and viable investment purchase.
They generally look to gain a basic understanding of the principles involved in property, finance and taxation and would look to seek professional advice for help with structuring a portfolio.
- The analytical investor
An analytical investor is the far extreme of a passive investor.
Instead of undertaking little research and due diligence, this type of investor tends to go overboard and spend months, or even years, examining data, seeking advice and reading material in order to look for the ‘ultimate’ investment property.
While it may seem that an analytical investor is more likely to make successful investment decisions, it’s actually not the case.
The problem with property data
There’s no doubt that it’s important to understand the property fundamentals and research appropriate and reliable property data, and the more extensive the data research is and the longer it goes back, the more accurate it is in forecasting future trends.
But the problem is, data is often wrong.
Unfortunately, the most commonly-reported data - median price data - is actually very unreliable.
There are three reasons:
- Because median prices fluctuate depending on the way the property is sold. In many suburban areas, where property sold a number of years ago and vacant land has now been replaced by new homes, this data is irrelevant.
- Similarly, new apartment or townhouse developments can skew median house prices of other local properties.
- Gentrification and renovation changes the nature or quality of properties which again, results in the median house price for the area being incorrect.
Using median price data is risky for investment purchases and can cause costly investment mistakes.
Just because median prices go up in the area doesn’t mean that value of any local property also increases.
So is property investing an ‘art’ or a ‘science’?
It’s true, successful property investors need research and data to aid an investment decision, but it’s not enough on its own.
Investors also need to compliment any applicable data with local area knowledge and expertise, plus experience and perspective in order to make the best-informed choices.
Someone looking at data can make it say almost anything they want; the trick is knowing how to take that information and use it in conjunction with some practical experience in order to accurately make an investment decision.
In other words, data and research is a critical step in getting ready to invest, but it is only one of the many important steps.
What’s the key lesson here?
Property investment is an expensive game, and you can’t afford to get it wrong.
Engaging with experts with many years of experience can help you avoid making the costly mistakes made by so many naïve investors.
Remember, property investment data is crucial when making an investment decision, but it’s only half of the work.
Should you become a borderless investor?
You know…invest in another state?
The short answer? Yes, absolutely!
The long answer? There’s so much you need to consider when investing in property, and the location and your proximity to the property is just one of them.
Investing interstate is not without its risks.
But to be a successful property investor who creates sustainable, lasting wealth from your property portfolio, it’s my belief that you need to adopt a diversification strategy.
This is because (and I may sound like a broken record here to people who have read my articles or seen me speak on this topic before), there is not one “single” property market in Australia.
Our country is made up of many real estate markets, which don’t always move in sync – they each have their own cycle.
Just look at the significant variance of the different property markets in 2020 for evidence of that.
Values have been falling in one market and rising in another, a dynamic that sometimes plays out at a suburb level.
By that I mean, one suburb can be experiencing growth, while a nearby suburb may not.
Investing in a city other than your own can be a wise way to spread your risk across multiple markets, and take advantage of growth cycles that may be stronger than your local area.
Think about it: if you limit your investment options to your own backyard, are you really setting yourself up for financial success?
Furthermore, searching for properties in your local area is not really “researching”.
Rather, it’s searching for facts to support your ready-made preconceived opinion that the area is a good place to live or invest.
And here’s the truth about property investing...
Diversification of location is key.
This is very different to having a philosophy of diversification of investments, which is a whole other ballgame (on which I have very strong opinions!)
It’s those investors who have diversified property portfolios who will find they benefit, as different capital cities each have their own day in the sun – as their cycles peak at different times.
There are also land tax issues to take into consideration. If you acquire a number of property assets within one state, you could end up paying a whopping land tax bill every year.
By spreading your risk and buying properties in various locations, you may minimise the amount of land tax you’re required to pay. This is not a reason to diversify, it’s just one of the possible benefits.
Now don’t get me wrong… I’m not suggesting investing in other states just for the sake of it. What I’m recommending is that as investors build their property portfolios, they should add investment grade properties in the 3 big capital cities in Australia to their assets.
Links and Resources:
Shownotes plus more here: Is Property Investing an Art or Science? Becoming a Borderless Investor + More
Some of our favourite quotes from the show:
“Instead of undertaking appropriate due diligence by closely looking at property data, many investors are making emotional purchases and it's causing poor decision making.” – Michael Yardney
“Failing to combine the science and the art of property investment could end up costing you a fortune.” – Michael Yardney
“By spreading your risk and buying properties in various locations, you might minimize the amount of land tax you’re required to pay.” – Michael Yardney
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