What type of property investor are you?
In general property investors are all after the same thing. They buy property because they want to develop a degree of financial freedom. While some are looking to quit their jobs, others just want to have the choice of whether they work or not. Some are trying to save for their retirement while others want to leave something for their children.
Yet most property investors never achieve the financial independence they strive for, with close to 90% never owning more than one or two properties. On the other hand, a small group of investors manage to build substantial property portfolios.
Over the years I found that investors tend to fall into three main categories, which led me to investigate if one style of investing was more successful than others.
So let’s look at the 3 main types of property investor.
Firstly there is the passive investor, who tends to spend little time looking for a property. They are not interested in understanding all the ins and outs that go along with creating a property portfolio and are more likely to buy the first thing they come across, rather than conducting any due diligence or consulting others for advice.
The more active investor puts in some degree of work in order to find a good investment prospect. They gain a basic understanding of the principles involved in property, finance and taxation. They seek professional advice regarding structuring their portfolio and conduct some due diligence in the hope of increasing the likelihood of making a viable investment purchase.
Finally, there is the analytical investor, who tends to run around for months, sometimes even years, examining every nook and cranny of our property markets, endlessly comparing values and sales, reading reams of material regarding property do’s and don’ts and seeking advice from as many experts as possible before committing to anything. They like to conduct as much due diligence as possible and look for the ‘perfect' investment property.
If property investment is like many other things in life, the more effort and energy you sink into property investing, the greater your rewards are likely to be. In other words, the passive investor would enjoy smaller gains than the active investor, while the analytical investor would come out on top as they were willing to do the hard yards.
In reality this is only partially true!
Many passive investors purchase their investment properties the way they would buy their home – emotionally. They tend to buy their investments near where they live, or close to where they want to retire or holiday – all emotional reasons. Some live to regret their investment decisions and have difficulty holding on to their investments and end up selling their properties after only a year or two. Those who can hold on usually do well, but more of that later.
The more active investor puts in some degree of work in order to find a good investment prospect. They gain a basic understanding of the principles involved in property, finance and taxation. They also tend to seek professional advice with regard to the structuring of their portfolio and tend to conduct some due diligence in the hope that they can increase the likelihood of making a viable investment purchase.
What about the analytical investor? Let me share a story with you.
A while ago I bumped into Leonard, a successful IT engineer. When I first met him years earlier he said he was going to invest in property, so I asked him how his investments were going.
He explained that he was still researching the markets. Now Leonard is very intelligent but has a tendency to over-analyse things, hence he was still waiting for the perfect property, the perfect time and the perfect set of circumstances in which to buy.
What he doesn’t realise is that this will never happen.
If he had invested in a well-located property in his home town of Melbourne (or in almost any major city) three or four years earlier, when I first met him, despite that time frame including some of the worst years in property market in more than a decade, his property would have increased in value significantly.
While the value of many properties has gone by 20 or 30% in that time, Leonard had $500,000 sitting in the bank waiting for the ‘right opportunity’ to come along.
On the other hand, let’s look at Mark – a passive investor who was so naïve that he bought the first property that he could get their hands on 20 years ago for $50,000. At the time, everyone told him he was “crazy” – it was a bad time to buy; it was a foolish thing to do and he paid way too much.
Although he may not have done all of his homework, Mark bought in a popular inner suburb and the value of that property is now in the order of $500,000. And if he was half smart, Mark has borrowed against its increasing equity to allow him to buy more properties.
The lesson from all this is that it really doesn’t matter if you’re a passive, active or analytical investor, as long as you are taking action and are in the market.
Of course, you can’t just buy any property and hope it will increase in value – particularly in the current market. Educate yourself and make informed investment decisions, as long as you don’t get so absorbed in the process of learning that you forget to use that knowledge to buy something!
If you have been thinking about investing in property, maybe now is the right time to act. After all, we are in a buyer’s market – a time of great opportunity.
Buy a property that suits your current circumstances and investment strategy. If you are in it for long term, as you should be, doing something some might consider foolish right now could be much better than waiting to do something “smart” later.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.