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20/08/2020

Property investment rules to remember in times of uncertainty

There’s no denying it. We are living through strange times. Covid-19 won’t soon be forgotten. But like economic turmoil in the past, we will get through this too.

At times such as these it’s good to take note of those who have been through multiple economic cycles. These people will provide some perspective because they’ve seen things like this before. They tend to take a holistic approach to wealth creation – a very important viewpoint to remember.

It wasn’t that long ago the world experienced a Global Financial Crisis. We’ve seen major terrorist attacks, we’ve had wars, even other plagues like SARS and EBOLA. The resulting calamities included job loss, bankruptcies, suffering and death. Each time society found a way to bounce back.

By sticking to a long-term strategy, the experienced investor doesn’t lose his or her nerve when things aren’t looking so good. Conversely, they don’t go nuts partying like it’s 1999 when the markets are strong. They understand that ups and downs are part of the journey. It’s the long-term trend that counts.

It’s easy to get caught-up in the hysteria created by the media. For this reason alone, it’s a good idea to turn down the noise. Mainstream media will often use misleading headlines as clickbait to suck readers and viewers into watching their channel, viewing their video or reading their article. Experienced investors know to ignore this and instead zero-in on information that’s relevant and more fact-based. In other words, ignore all the headline-grabbers and doomsayers and just ride out the storm.

Instead, try following some fundamental principles to help see you through to the other side.

1. Invest with your head, not your heart – buying a property for investment purposes is about the numbers. Unless you plan to retire in it, the considerations should be a) will this property attract tenants and b) can I make money from it over time (growth) and c) how does this fit-in with my wealth creation plans? The other consideration is old vs new. Old may get you in a more established suburb but will limit depreciation benefits and may cost you significantly in maintenance and repair bills. New on the other hand can help with your tax deductions as well as not needing any significant spending for at least ten to fifteen years. Don’t get hung up on the postcode, landscape plan or colour of the kitchen – you’re not going to live in it. It’s just a money-making vehicle.
2. Stick to the plan Jan – make a plan and stick with it. As someone once famously said “without a map, any road will do”. If you have no idea where you’re going, don’t complain when you arrive to find you don’t want to be there. Make a plan and keep revisiting that plan on a regular basis (this is why we at Pillar are always hammering the Strategy Review to our clients).
3. Remember, location determines growth, not the quality of your benchtops – dirt, not bricks and mortar, is what determines growth. So long as your investment is in an area that people want to live in (demand), you can make money. The higher the demand, the more potential growth you can achieve over time. Sure, you can squeeze a few more dollars from the sale of a property that’s well put together and has quality fit and finish, appliances, etc. but there simply is no substitute for the suburb and neighbourhood character.
4. Don’t buy into the hype and don’t be put off by the headlines – hype can artificially inflate property prices and headlines are created to sell papers. Stick to the fundamentals (infrastructure, population growth, demographics, amenity) and turn down the noise. When in doubt, talk to an expert and let them guide you. Just don’t make an expert out of your neighbour, dentist or brother-in-law.
5. Demographics drives demand – areas that attract young married couples or growing families can experience good growth over time, particularly when the fundamentals (as mentioned in the last point) are evident. This is why new communities are so popular. They will often be near transport hubs, schools, shopping and recreational facilities such as parks and sporting fields.
6. The market is cyclic – it’s not completely constant or ‘linear’. All markets have cycles, peaks and troughs, ups and downs. All too often people forget this, panic and sell their investment at the wrong time. One point to remember, regardless of how much a particular market drops, if you don’t sell you don’t lose. That’s not to say you shouldn’t cut your losses when there is significant downward trend. The point is not to panic every time the market fluctuates as it’s a normal and many would say, a necessary occurrence.
7. Buy low, sell high – how many times have you heard this? Sadly, for many first-time and inexperienced investors, this is flipped on its head. Green investors lack the experience and confidence to pounce when the market conditions are in their favour. Instead they follow the pack, buying on an upward swing or even at the top of the market and paying top dollar. The astute investor can save tens of thousands of dollars buying during a downturn. Rather than trying to time the market and pick the bottom, experienced investors act quickly and decisively when the opportunities are evident.