The 4 most dangerous words in property investment
10 min read
Key takeaways
The best investors don’t try to outguess the market; they position themselves for long-term success with quality assets, strong financial buffers, and a strategic approach to property cycles.
Investing is about making informed, strategic decisions rather than chasing trends.
Those who stick to fundamentals, prepare for downturns, and take a long-term approach will build sustainable wealth.
Today I would like to share a memory from when I was still a novice investor.
One of my early mentors taught me that the four most dangerous words a property investor could say were…
“This time it’s different.”
Unfortunately, I ignored his advice in my early days of investing to my detriment, as I found that history does in fact repeat itself.
The best way to explain what I’m on about is to just trawl the Internet and look back over the last 20 years and you’ll two extreme opinions about Australia’s property markets:
- One group has been suggesting the property markets are going to implode.
- Another has been suggesting we are in for consistent long-term capital growth in property values.
In my view, the extremists, in both directions, will be wrong
Why?
Because history does repeat itself and having invested (some would say reasonably successfully) for over 5 decades, I’ve learned some lessons.
Probably the most important lesson I have learned is to never get too carried away when the market is booming or too disenchanted during property slumps.
Letting your emotions drive your investments is a sure-fire way to disaster.
Let me explain this in more detail by looking at 6 big lessons I’ve learned over the years:
Lesson 1. Booms don’t last forever
During a boom, everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn.
Our property markets behave cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom
I remember in early 2021 writing…
“At some time over the next year or so, this booming property cycle we are experiencing will be followed by a downturn which will pave the way for the next upturn which will lead to the next boom.”
And boy was I right!
So my prediction for the future is…
Going forward over the next decade we’re likely to have another recession, but I’m not sure when.
And we might even have another depression one day – because history repeats itself.
The lesson from all this is getting prepared for the next phase of the property cycle.
During the last cycle, most investors didn’t really have their downside covered or their upsides maximised.
As we move into a new phase of the property cycle this year as confidence returns is interest rates will slightly come down, most investors will again not make the most of the new phase of the cycle.
On the other hand, strategic investors will follow aproven strategy to perform the market.
Lesson 2. Understand the difference between Expectations and Forecasts
As I said, I expect there to be a recession in the next decade.
But I don’t know when it will come.
I expect that some investments I make won’t do as well as I would like.
But I don’t know which ones they will be.
I expect the property market to slump for a while and then prices will pick up again.
But I don’t know when.
I expect interest rates will fall and then rise again, probably not for a number of years.
In fact, I don’t know when.
And I expect another world financial crisis. But I have no idea when it will come.
And I expect another pandemic one day, but I don’t know how bad it will be or when it will come.
Now, these are not contradictions or a form of a cop-out.
You see…there’s a big difference between an expectation and a forecast.
An expectation is an acknowledgment of how things worked in the past and will likely work in the future.
A forecast is putting a time frame to that expectation.
Of course, in an ideal world, we would be able to forecast what’s ahead for our property markets with a level of accuracy.
But we can’t because there are just too many moving parts.
Sure there are statistics that are easy to quantify, but what is hard to identify is exactly when and how millions of strangers will act in response to the prevailing economic and political environment.
And then there are all those X factors, unforeseen events that come out of the blue, which could be local or overseas that undo all the predictions and all forecasts we made.
So what do you do about this?
Well…some people just keep forecasting anyway, and the media carries stories from these experts looking for a headline giving them a false sense of precision and veracity.
Then there are the other forecasters who just extrapolate, assuming our future will resemble our past.
But it won’t.
In mind, both of these methods can be dangerous.
I’ve found it’s more practical to have expectations without specific forecasts.
That’s because when you expect something to happen at some stage in the future, you’re not surprised when it comes.
It forces you to invest with room for error and psychologically prepares you for the inevitable disappointments.
This is exactly how I planned for the property downturn of 2020 and that of 2022.
I didn’t know when they would come, how long they would last, or how it would affect the value of my property portfolio or the cash flow of my business.
I didn’t know the downturn of 2020 would be caused by our economy closing down because of a worldwide pandemic caused by a virus transmitted from a bat someone ate in China.
I just knew a downturn would once again.
And I was prepared for it with cash flow buffers.
There is a huge difference between, “I expect another next property downturn sometime in the next decade” and “I expect the next property downturn in the second half of 2025”
One of the big differences is how I invest.
If I expect another property boom followed by another property bust, I’m not surprised when they come.
But since I don’t know when they’ll come, I won’t make the focus of my property investing trying to time the property cycle.
Because trying to time the property cycle is one of the reasons many property investors fail.
On the other hand, strategic investors maximise their profits during booms and minimise their downside during busts by investing in assets that have always outperformed, rather than looking for the next hot spot or for the type of property strategy that works “now” rather than one that has worked in the long term.
They own investment-grade assets in investment-grade inner and middle ring suburbs of Australia’s three big capital cities.
The type of property that keeps growing in value over time without fluctuating wildly in price when the property cycle slows down.
Lesson 3. Beware of Doomsayers
As long as I have been investing, I remember hearing people with excuses why property values will plummet.
However, during that time well-located capital city properties doubled in value every 10 years or so.
Sure home values languish at times and of course, property prices will fall a bit during this slump stage of the property cycle, but the value of well-located properties in our capital cities don’t “crash.”
They’re underpinned by the large percentage of homeowners that don’t jump ship when the market turns.
However, fear is a very powerful emotion and one that the media used to grab our attention.
Sadly some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.
Lesson 4. Follow a System
Strategic investors follow a system to take the emotion out of their decisions and ensure they don’t speculate.
This may be boring, but it’s profitable.
Let’s be honest, almost anyone can make money during a strong property market because the market covers up most mistakes: A rising tide lifts all ships
But many investors without a system found themselves in financial trouble when the market turned.
Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.”
In other words, if you aren’t following a system that works in all market conditions you will be caught with your pants down when the market changes.
If you prefer to have consistent profits and reduced risk, follow a proven system.
Make your investing boring, so the rest of your life can be exciting.
Lesson 5. Get Rich Quick = Get Poor Quick
Real estate is a long-term proposition, yet some investors chase the “fast money.”
You’ve probably met people like that – they look for that one deal that will make them fabulously rich.
When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.
They are often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy.
Their stories can be very compelling, even hard to resist and they usually pander to the wishes of people who would like to give up their day job to get involved in property full time, but in reality, it takes most people many years to accumulate sufficient assets to do this.
Patience is an investment virtue.
Warren Buffet said it right when he explained that:
“Wealth is the transfer of money from the impatient to the patient.”
Lesson 6. It’s about the property
You’re in the business of property investment, yet during the last boom, many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations.
Instead, they got sidetracked by chasing the next “hot spot” and got caught out when the mining boom faded.
Or they bought “cheap” properties in secondary locations or chased cash flow in regional areas and now they feel they’ve lost out as the property boom in our capital cities passed them by.
Strategic investors do it differently….
They make educated investment decisions based on research and buy a property below its intrinsic value, in an area that has experienced above-average long-term capital growth and will continue to do so because of the demographics of the people living in the area.
Then these smart investors “manufacture” capital growth by adding value through renovations, refurbishment, or redevelopment and hold on to their properties as a long-term investment.
These are just 6 of the many lessons that I have learned over the years.
What have you learned?
Please leave your comments below.
