A message from our CEO & Founder, Joseph Chou.
Common mistakes when it comes to property investment
The interesting thing about property investors is that so many do not associate buying a property with becoming financially independent.
So many investors let emotion guide their purchases, rather than making a strategic decision on what’s right for their portfolio.
Some bought in Sydney after the horse had all but bolted and are now worried about their investment after reading negative headlines in the newspapers. Others were in a position financially to invest, but didn’t, and therefore missed out on making any money in the last Sydney boom.
So many investors lack goals, planning, strategy, support, and ultimately – lack execution. Either because they spent weeks or months in researching without making a decision, or because they didn’t have the capacity to hold their assets for long enough.
These mistakes are all too common in my experience, both as an investor and from what I’ve observed in my years of working in the industry. And all these mistakes essentially boil down to one thing: having the wrong mindset when it comes to investing.
Your attitude and your approach to investing will have a significant impact on your long-term success as an investor. Without the right mindset, you’re likely to fall victim to one of the following five common mistakes made in investment management by so many investors.
Lack of strategic thinking
Many people think: “this is how much I earn, and this is how much equity I have, so this is how many properties I can buy.”
Few people think: “I want to earn X amount of income per year from a portfolio of assets with a value of X” and work backwards from this goal to develop a strategy to achieve it.
On the other hand, there are many investors who do not acquire their assets strategically, but simply buy because of a perceived ‘bargain’ or discount on offer. With the current lending squeeze, you’ll find some developers offloading properties at a discount. But maybe those properties were wrongly priced to begin with – and even at a discount still don’t represent value. If you want to achieve long term capital growth, the key is to think where affluent people will want to live – a poor quality, cheap apartment next to a railway line is probably not the one!
It’s also important to have the right strategy in place for you. For example, I know there’s many people who do small property developments and renovations.
But many investors aren’t cut out for DIY – either because they’re not passionate about it, they don’t have time to do it or they have no expertise.
Many don’t want to get their hands dirty or have the project management experience to manage tradies and stick to a budget. DIY also requires cashflow upfront to do it.
With investment, you don’t need to be an expert; and you can’t be if you are working at the same time at another career. I’ve been in the industry a long time, but I still rely on the expertise of others – our Ironfish Managing Directors, our Property & Research team. I also have my own team of solicitor, accountant and broker as well.
Think strategically about how you are spending your time and money, what you are buying and why is this going to add value to you over the longer-term. If you’re unsure, look to a specialist for help and build the right team around you.
In my experience, property is a forgiving asset – if you give it enough time. If you paid ‘too much’ for a Paddington [Sydney] terrace back in 1964 – say $11,000 instead of $10,000, would you really be too worried about that today?
The key to successful investing is to turn a short-term property purchase into a long-term asset. Yet, many people fail to realise this is easier said than done.
What many investors expect or want is a nice cheap property, quickly rented out, no bad tenants and fast growth. But it doesn’t work this way. The journey to wealth is meant to be bumpy – and it takes time. If it were easy, it wouldn’t have value and everybody would be wealthy.
The other problem is most people around you, including the media, will be judging property by its short-term performance. I got asked by an investor magazine to provide an example of a property that’s provided a 300% return in six months. While it may be possible to produce such an example, the truth is you need to be holding that property well before the market starts heating up. Because I can assure you that by the time you hear that the market’s heating up, you’ve already missed the boat on achieving the biggest results.
I had a customer, a Qantas pilot, who is a long-term investor, who owned seven properties, including a 1-bedroom in Bondi Beach which he bought in 1991. For five years there was zero growth, most people told him that he’d paid way too much for it and that it was a bad investment. During these times, many lose faith, and sell at a loss. But my friend had a long-term mindset, so he held it. In 1996, the property doubled in value. People may say, well why not just buy it in 1995? But the truth is no one can predict these things so precisely, and by the time you read about it, it’s already too late.
Buying a property is relatively easy, holding it is the hard part. Many investors, when they experience longer than expected vacancy, a bad tenant, no growth – they give up too soon. Short term growth is great for confidence, or for building up your equity but it’s not always going to work that way. Professionals can help you keep the faith during challenging periods.
Listening to the wrong people
People tend to listen to the people closest to them because they trust them, such as friends or family. But if these people have no experience in investing and no results to show you, then there’s little value in seeking their opinion or advice.
People also tend to listen more to negative people or the media. But I’ve never met one person who became successful from following the media!
Property is a big-ticket item, it makes sense that you want to do your research and due diligence to ensure you’re confident about your decision. But just make sure that you’re not taking financial advice from a financial planner who hasn’t got his/her own finances in order!
If you’re looking to build wealth through smart, structured property investments, learn from someone who has done it before. Only listen to people who can help you learn more, grow and pull you forward towards your goals.
Saving vs earning mentality
Some people have the ‘saving’ mentality – rather than an ‘earning’ mentality. This group of investors look to save a few pennies by self-managing their property or do a renovation to add a little bit more to the rental price.
Think of property investment as a business you’re building, and you are the CEO. Get other people, the ones with the expertise to do the work for you. While you’ve got your team managing your business, this leaves you free to focus on your own work. Better to spend that time growing your own career, increasing your value at work and your income.
I had a lady meet up with me recently, who came along to one of my seminars 10 years ago. Since then, she’s built a portfolio of four houses which have doubled in value. She did this on her own; she didn’t purchase with us. She did all the inspections and searching herself and has managed to achieve a lot more than most people.
But recently, she’s had to sell one of those properties, because whilst she’s now ‘asset-rich’, she remains ‘cash poor’ and has low serviceability.
I said to her, “You’ve done a great job, but I think if you’d sought our help you could have done a lot better. You could have leveraged our time to build and manage your portfolio, leaving you free to focus on growing your own income and career to improve your serviceability and potentially even build up more assets.”
There’s no point winning the battle only to lose the war!
Knowledge without action
Over the years, I’ve met many people who have been to every seminar, done all the research, read every report – and yet, have done very little, or perhaps even nothing with their knowledge.
Knowledge is there to be applied, otherwise what’s the point of knowing?
Some people tell me proudly that they’ve personally inspected hundreds of properties or talked to hundreds of agents. But frankly, this tells me that this person has no respect for their own time.
It also tells me that while they may think they know everything, they’re scared to make a decision. Once you make a decision it’s easier to move forward. Successful people tend to make decisions quickly and change their minds slowly.
While some may not buy anything, others may buy too much – jumping on the bandwagon because everyone else is. Then later they are faced with the problem of being unable to service their mortgage and hold onto it.
In the last 13 years, we’ve helped many investors build their portfolio, and in the meantime, they have doubled their income – increasing their cashflow for today and tomorrow. Many of these investors managed this achievement simply by having the seed planted that it could be done.
Because it’s not that people don’t want to grow their income – either through their career or through building a portfolio – they just don’t know how to. So they go with the flow, do what everyone else is doing and encounter the inevitable pitfalls.
Based on my personal experience, I can say unequivocally that if you harness the right mindset or mentality as an investor then not only can it help you avoid the common mistakes made in investment management, but overall, this is the one thing you can do to set yourself in good stead for longer-term success.