Property investment: breaking down the fear factor
Fear is one of the major factors that prevents us from exciting new opportunities. We show you why property investment is nothing to be scared of.
A life lived in fear, is a life half lived” – Strictly Ballroom, 1992
That famous quote from the Australian musical comedy, Strictly Ballroom, is a terrific way in to explore one of the biggest obstacles for any would-be-investor: that is, the initial fear of actually entering the market.
There’s no question that fear can paralyse us. Fear taken to its enth degree leads to all kinds of psychological hurdles and mind games. The more afraid we are of something, the more we build up this invisible obstacle in our heads. Similarly, with property investing, many would-be-first-time buyers can have misconceptions about what’s required to become a property investor. This turns into fear and prevents action into a journey that’s really not that daunting.
A lot of the fear comes from misconceptions about property investment, so let’s examine them:
One common fallacy is that only the very rich can afford to access the property market. Or that by having an investment property and having a mortgage you’ll be stretching yourself too far and will end up losing out, perhaps even having to do a forced sale and losing money. Another is that you need to buy where the action is; so if there’s a rush toward, say, investing in apartments on the Gold Coast, that’s then where you need to put your money. Or the argument that if all other investors are hesitant and pulling aback then you should too.
Billionaire businessman, Warren Buffett, one of the great American success stories, famously said: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
In other words, trying to be successful through following the herd rarely works.
By the time you’ve bought the tickets that train has already left the station. Consider how Perth housing peaked and then crashed when the bottom fell out of the mining economy. With property there’s also a slow catch up in terms of actual development. Building approvals and construction are always behind whatever the market is doing. By the time a new apartment complex is built and ready the market may already have peaked and moved on. We’ve since this happen time and time again. The over development of apartments in Melbourne is one such example. So trying to cash in on a property investment trend is usually ill-advised. A rule of thumb is: if you’ve publicly heard that it’s a hot new property investment trend – then its probably too late to take advantage of it.
Let’s look at the second part of Warren Buffett’s quote – “being greedy only when others are fearful”. This means buying up stock and product at a time when the market is at a real low. With Australian property we know the market will always go up in the long term. So then it’s about buying smart and picking out the areas that have all the right ingredients for strong capital growth.
Fortunately we live in a time when sophisticated research and the tools to make informed decisions have never been better. Twenty years ago, few would have picked Bondi or Surry Hills as places in Sydney that would become red hot and unaffordable. Who would have guess, back then, that Balmain in Sydney or St Kilda in Melbourne would become gentrified? Now, with so much data and analytical tools at our disposal, it’s much easier for us to predict where the next Bondi or where the next St Kilda will be.
This brings us to the next point, which is that the technical tools available take a lot of the uncertainty out of property investing and thus remove the fear. It does mean adjusting one’s mindset and looking further afield. If you’re trying to get into the property market in Sydney and aim for an investment property for less than $800 000 you’ll probably have to look further out – perhaps west of Parramatta or south of Campbelltown. There’s nothing wrong with doing this. Sydney is a rapidly growing, expanding city and there are many affordable areas that will soon take off. Equally, as an investor, you should also think nationally: where are the affordable areas that will take off in Brisbane, or Melbourne or regional Victoria or NSW? Again, we now have access to many tools to make this qualified research possible.
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Let’s address the other fear factors about property investment: the notion that trying to juggle a mortgage and an investment property is simply too much and will stretch the investor financially.
As an investor the ideal scenario is to have a property that pays itself off with the bonus of capital growth. This means a positively geared property where the annual rental yield covers the associated costs such as maintenance, management fees and the mortgage is the goal. Of course a negatively geared property can suit certain investors and we’ve written extensively about this. But if you’re juggling a mortgage, and operating on tight financial margins then this scenario suits you beautifully.
How is it possible? Again, we go back to research. It’s choosing suburbs that are projected to have solid long term growth; that have growing or planned infrastructure and have a booming local economy and are easily accessible to major centres such as universities, airports or business districts. Other features such as lifestyle (ie. If they’re on the coast) or proximity to the city may also come into play.
It’s all about the long term and building a careful future of incremental wealth. This is where property investment works best, when capital growth and positive rental yield are steadily building your wealth year after year.
Or to use another Warren Buffett quote: Someone's sitting in the shade today because someone planted a tree a long time ago.