In today’s show Michael Yardney, from Metropole Property Strategies, has some great advice – he wants to remind you to prepare for the worst while hoping for the best – in other words, maximise your upside while, at the same time, covering your downside.
Kevin: Here’s some great advice from Michael Yardney, who wants to remind you to prepare for the worst while hoping for the best – in other words, maximize your upside while, at the same time, covering your downside.
Is that like covering your backside, Michael?
Michael: Kevin, I guess what I’m suggesting is that we have to design our property portfolio that can weather the inevitable storms that are going to come over the next years.
Kevin: It is a bit of a journey, isn’t it, rather than a destination?
Michael: To build your wealth to get to financial freedom, for most investors, takes a minimum of 15 years, and for many, even longer. During that time, you’re going to be working through a couple of property cycles, some high interest rate times, some low interest rate times, some times when the property market is flat.
I guess the question is, how do you weather it? What do you do? How do you protect yourself?
Kevin: How do you prepare, Michael?
Michael: I guess it starts off with the correct asset selection. What I’m suggesting is you have to have the properties that are strong – in other words, they keep growing in value – but also that are stable – they’re not going to fluctuate in value as much – which means, I believe, you have to invest in the big capital cities because that’s where they’re underpinned by multiple pillars of economic support and have the sort of property that appeals to a wide demographic, particularly of owner occupiers, because they keep buying things as the market keeps moving up and down.
Kevin: How important is it to diversify your portfolio?
Michael: Kevin, it’s important, as you build your portfolio, to protect yourself by having properties in various states, because each state is in a different stage of the cycle, and there will be some times when you’re thankful that it’s not in your home state because that’s the area where property values will increase, and you can go back to the bank and revalue those while leaving others alone.
Kevin: I guess it’s pretty important, too, Michael, when we’re considering this, to think about where you stand financially – in other words, not overcommitting yourself.
Michael: During boom times, it’s so easy to get carried away, borrow to the max, lower your loan-to-value ratios, not leave yourself with a buffer, and that’s when people get caught short. It happens every stage near the end of the cycle, when people are trying to do one more deal or just get in before the end, and you never know when that’s going to be, Kevin.
I agree with you. Don’t speculate, stick to tried and true strategies, and leave yourself with a bit of a financial buffer.
Kevin: Spend some time, too – I think, Michael, I’ve read enough of what you’ve written – making sure that you have that buffer and that you buy well.
Michael: You buy yourself not only a great property, but a financial buffer means you can buy yourself time. You can ride out the periods when you don’t have to go back to the bank for a while and say, “Please, can you revalue my portfolio.” You ride out the periods where the interest rates may go up or vacancies may be a bit longer, because those investors who can see themselves through from one period of the cycle to the next are the ones who are going to do well.
Kevin, the other big benefit of the buffer is you’re going to have some money available to hop into the market when the inevitable downturn occurs, and you’ll be able to get what seems like a bargain at the time when other people aren’t ready.
Kevin: I really enjoyed my time at the Wealth Retreat, Michael, on the Gold Coast recently, and one of the things that I learned from talking to the great number of people who are there is that they have a plan but they actually work on it. They’re very, very proactive with their strategy.
Michael: They’re thinking in advance, they’re thinking ahead, and I guess that’s what we’re talking about in this little chat, Kevin. As you started off saying, look forward to the upside, but prepare for the downside, because I read many years ago that King Solomon had inscribed in his ring the words “This too shall pass” to remind him not to be too overconfident when things were flourishing and not to be too despondent when things were bad.
Kevin: I guess you have to concentrate on not being negative but understanding that tough times do come, Michael.
Michael: That’s what Warren Buffett said: “Be fearful when others are greedy and be greedy when others are fearful.” The tough times are good times if you’re prepared.
Kevin: Great talking to you. Michael Yardney, from Metropole Property Strategies.
Michael: My pleasure, Kevin.