We are going to kick the year off with some very sound advice from Michael Yardney as he talks about the 12 important lessons for property investors in 2017.
Smart investors are always learning and undertaking personal development. The property markets are dynamic, so dynamic in fact that you never quite “solve the puzzle” because the puzzle is always getting reshuffled in front of you right when you think you’ve got it solved. As Michael says “The more I learn, the less I seem to know”.
Kevin: As we welcome you back to the shows for 2017, my good friend Michael Yardney will be joining us again this year.
Michael: Hello Kevin.
Kevin: Great to be back with you again in a brand new year. Michael, I read a really interesting article that you wrote that I wanted to deal with first up in the show because I think there are so many great points in it: the important lessons that all property investors should remember this year.
Would you mind taking us through those?
Michael: Sure, Kevin. Every year is a time for learning and personal development. I think one of the great things about being involved in the property market is putting all the bits of the puzzle together. Yes, even though I’ve been involved in property for over 40 years, I did learn some new things, and I guess I relearned some lessons that I learned the hard way many years ago, as well, Kevin.
Kevin: What’s the first lesson, Michael, you’d like to tell us about?
Michael: Maybe the first one should be don’t let emotions drive your investment decisions. We know that market sentiment is a key driver of our property cycles and it’s one of the reasons the markets over-react. They overshoot during booms and they get a bit too depressed during slumps. So it’s important never to get too carried away when the market is reacting one way or another because letting emotions drive your investments is a surefire way to disaster.
We know each boom sets itself up for the next downturn, just as each downturn paves the way for the next boom. So take advantage of the good times that are going to be ahead in 2017, but be prepared for the next phase of the property cycle, Kevin.
Kevin: Yes, and just on that point, too, Michael, that leads us into the second one, which was take a long-term perspective. I guess if you take the lessons from the first point you made there, that would naturally follow on, wouldn’t it?
Michael: Very much so. Residential real estate is really not a get-rich-quick scheme, so don’t try and do it that way. Take a long-term perspective, and don’t let short-term influences affect your long-term decision-making, Kevin.
Kevin: I remember the last show for last year, Michael, you said to us that one of the big stumbling blocks for this year would be finance, and you make that as the third point, that property investment is a game of finance rather than a game of real estate.
Michael: Very much so. A lot of investors who had equity in their properties last year had difficulty getting refinance because APRA tightened the credit extension. You weren’t able to get more credit because of changing serviceability criteria.
One of the lessons is have a smart, investment-savvy finance broker as part of your team to help you through the maze, but the other is to make sure you only own investment-grade properties, good properties, because this will ensure that you can maximize your borrowing capacity, Kevin.
Kevin: Point number four in your article, Michael, was a lesson that we saw come home time and time again last year, and that is that there is no one property market.
Michael: That’s an important lesson, Kevin, that I learned many years ago but very much was to the forefront the last couple of years where it really was a two-horse race with Melbourne and Sydney leading the property market as a lot of people talk about. But there isn’t even one Sydney property market or one Melbourne property market. The top end performs differently to first-home buyers, so our property markets are segmented by location but also by the type of property and by price points.
I believe in this current year now, our new year, it’s likely that both Melbourne and Sydney will again outperform – but not all segments of those markets. I’d be avoiding the new and off-the-plan segments of the market. You’re right, Kevin, there’s not one property market.
Kevin: In fact, reading the article, too, Michael, you make the point that there are something like a quarter of a million properties for sale in Australia, but how many of those are investment grade, which is actually the fifth lesson you talk about. Could you take us through what makes an investment grade property?
Michael: Sure. Any property can be an investment property, Kevin. You kick out the owner, you put a tenant in, and it’s an investment. But not all properties make good investments, again, as we said a minute ago, because there are multiple markets.
In my mind, an investment-grade property is one that appeals to a wide range of more affluent owner-occupiers, which means it’ll always be able to sell later if you choose to, and one that’s got a level of scarcity. It’s a property that’s in the right location and one that has got good prospects of long-term capital growth. It’s a property that has street appeal and offers security, again, because owner-occupiers like that.
I like properties that have a high land-to-asset ratio because it’s the land component – not how big the land is or how much land there is, but the value of the land under your apartment even – that goes up in value. I also like investment properties to which you can add value.
If one puts all those characteristics into all those quarter of a million or so properties for sale, in my mind, currently less than 2% of properties would be what I’d be comfortable to call investment grade. In other words, don’t just buy any property and hope that the value of the property is going to increase, Kevin.
Kevin: I’m talking to Michael Yardney from Metropole Property Strategists, and these are the 12 important lessons that all property investors should remember in 2017. We’re about halfway through, Michael.
You and I have talked many times over the years about your five-stranded approach, which is your system. How important is it that we have a system?
Michael: Kevin, to be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But when the market turns – as it did at the end of the mining boom, as it did during the Global Financial Crisis, as it does regularly on us and surprises us – what happens is many investors without a system find themselves in trouble.
Warren Buffett said a rising tide lifts all ships, but he also said that you only find out who’s swimming naked when the tide goes out. In other words, if you don’t follow a system that works in all market conditions, you’re likely to get caught naked when the market changes. I think it’s a critical factor of success in property investment, Kevin.
Kevin: Point number seven you make – and once again this is another lesson that came back time and time again last year – is the get-rich-quick schemes or the investors who want to make fast money. Has that been a mistake that you see many investors make, Michael?
Michael: Yes it is, and let me make the first prediction on your show for this year, for 2017. There’s going to be a new swag of people coming out and filling our inboxes with ways of getting rich quickly in property.
I think the lesson from previous cycles is that residential real estate is a fantastic way of transferring wealth from the impatient to the patient. So don’t think you’re going to give up your day job quickly. It takes a couple of property cycles – 10 or 15 years – to build a substantial asset base in real estate, Kevin.
Kevin: What was that great saying from Warren Buffett?
Michael: Wealth is the transfer of money from the impatient to the patient, one of Warren Buffett’s great sayings.
Kevin: And one of the ones I’ve heard you mention many times.
Michael, number eight: beware of doomsayer predictions. Do you think we’re going to get more of those this year? That’s a dumb question because I know we are going to.
Michael: I remember your great interviews a couple of years ago with Harry Dent, who was so sure how the property market was going to crash by the middle of the year, and last year, you had people on from overseas, as well.
Every year, there are these overseas gurus who tell us why our property values are going to plummet. Unfortunately some people have missed out on the opportunity of developing their own financial independence because they listened to the messages of these doomsayers.
On the other hand, a small group of Australians have ended up becoming financially independent because the value of the properties that they bought when everyone else said they were silly kept doubling in value, Kevin.
Kevin: Over Christmas and the New Year period, I had a couple of weeks off, Michael, and I picked up your latest book, which I think is fabulous – your Guide to Investing Successfully. The thing that occurred to me in reading that book takes me to point number nine, and that is that you have to treat property investment like a business. In reading your book, that’s very much the message that comes through time and time again, Michael.
Michael: Yes, Kevin. Thank you. I guess the reason is that successful businesspeople have a different head space, a different mindset. They are accountable, they don’t blame others, and they take responsibility. Sure, they have a good team around them, they have some good advisors around them, they don’t try and do it all on their own, but they take financial responsibility for their investments – and that’s what you should do as a successful real estate investor.
Kevin: I did some segments recently, Michael, for a company who wanted to get some tips on real estate, and I made the comment then that 25 years ago would have been a great time to invest. The second best time to invest would be right now, which takes us to the next lesson, and that is that there’s always a reason not to invest.
Michael: Yes, Kevin. When I first started investing I tried to do it counter cyclically because that’s what I read, so I thought, “Aha, this is a good year not to invest or maybe this is a better year to invest.” And I realized that every year brings its own set of crises and there are always reasons not to invest.
You can go back as far as you like in history, Kevin, there are always issues occurring that would give you a reason to sit on the sidelines. One of the worst mistakes investors make is that they see this news as a reason not to get involved.
I’d take advantage of the opportunities any bad news brings and just buy the next investment property when you are ready financially and when you can afford it. As long as you buy what we spoke about a moment ago – an investment-grade property – and allow the cycle to work its magic, you’ll be ahead.
Kevin: I’m always constantly amazed and impressed, too, when I go to one of your seminars and I can see people – very successful investors who are in your team – they come back year after year after year because they are always continually learning, which takes us to the next point, and that is about learning, Michael.
Michael: I think the point I’m talking about is that you know less than you think you know. When I first started off, Kevin, I thought I was smart. One of the worst things a beginning investor can do is get it right the first time, which is what I did, because you think you’re smarter than you are. But the market will soon teach you some lessons, won’t it, Kevin?
The big lesson is that I know much less than I think I know. And if you don’t remember that, the market will soon humble you. So always continue learning.
Kevin: The final point – and I’m going to quote you now, Michael, because I’ve often heard you say this – is that any problem that money can solve isn’t really a problem. This comes about the confusion between money and wealth.
Michael: I think when I first started off, I was chasing money because I came from a poor background. I’m sure a lot of other people are thinking that money equates to wealth. I heard somebody very clever say many years ago, true wealth is what you’re left with when they take away all your money or all your property or all your shares.
I became a lot happier when I came to realize that money and wealth are very, very different things. Money is really important in those areas where it’s important in your life, and it’s not at all important in those areas where it’s not important.
True wealth is your family, your friends, and your health – there’s no use having all this if you don’t have the health to enjoy it with – your spirituality, having the right head space and the mindset, and to me also being able to contribute back to society.
Kevin, that’s 12 lessons I want to share with you this year. But hopefully when we discuss this again at the beginning of 2018, I’m going to be even smarter, and maybe I can come up with 13 lessons next year.
Kevin: Oh goodness. Okay, that’ll be fantastic. Great talking to you again, and thank you and thanks for your continued support. We look forward to working with you during 2017. Thanks, Michael.
Michael: My pleasure, Kevin.