The key strategy to being a successful investor

GUEST OBSERVATION

One mistake many property investors make on their road to wealth is purchasing as many properties as they can, not taking into account location or price or, most importantly, land value.

But you don’t need to own multiple properties to be wealthy. You just need to make sure the ones you do own count – and of these properties, at least two should be what you refer to as your ‘core assets’.

The core asset properties in your portfolio are you staples; the ones you’ll keep for 10 years plus and will guarantee a significant growth over that period. They are not speculative; instead they are investments that are continuously increasing in value over that time frame.

It’s important to get this right from the start. These properties need to be in a 5km-10km radius of a major capital CBD, affordably priced with a high level of tenancy and high rental returns.

They need to be purchased at 5% to 10% below the market value to secure a return. I call this the ‘margin of safety’ when buying any investment property and it’s crucial for putting you in the right mindset for managing a portfolio with a positive outlook.

Buying fewer properties will also mean spending less on stamp duty and purchasing costs. I have always said that Governments are usually the big winners from real estate transactions, with removalists a very close second. But it doesn’t need to be that way!

Remember, we are just in this for the money, not for the purpose of saying you own multiple properties. What is important is your net worth; not your gross amount of properties.

Once you’ve purchased your first core asset, wait three years or more until you’ve built up enough equity to purchase another. It may be boring, but good investments usually are. Just remember, they have huge long term rewards.

How long till my property doubles?

A general rule of thumb exists in the investment world that property doubles every 7-10 years. While this is simplistically true, for those buying lemons or at the wrong time, nothing could be further from the truth. Did you know that:

• Between 1960 – 1972, it took 12 years for to property to double
• Between 1972 – 1975, it took 3 years for to property to double
• Between 1975 – 1983, it took 8 years for to property to double
• Between 1983 – 1988, it took 5 years for to property to double
• Between 1988 – 2001, it took 13 years for to property to double
• Between 2001 and 2013 – it took 12 years for property to double

Source: Value Investing in Property; What would Warren Buffett do if he was buying property in Australia? (Gavin McPherson)

So you can see that for those that bought wisely (say in 1972 or 1983) the purchase of one astute investment property could certainly reap far more rewards than 3 poorly timed ones! Not to mention the levies, taxes, stamp duties and maintenance along the way. 

Importantly, you will need to consider the location of the investment and how much land value is intrinsically within the land component. Do not assume capital growth without taking into consideration those key points.

Assuming returns of 10% and 11% year on year is unrealistic - you need to average your returns over 10 years and be as positive about your portfolio in bad years as you are in good.  Remember, property only needs to increase by 7% per annum to achieve this outcome.

Is it harder than it used to be?

Unfortunately above trend capital growth will get harder and harder in the future. The returns of the past will not be the returns of the future, but rewards can still be gained by following demographics; my secret pastime.

For those of you that already own some ‘dog’ properties, don’t despair. Just think, even if you purchase the worst property investment, it will come good over time with the power of inflation. You are certainly in a great market that will forgive al lot of your properties downsides. But for those that are about to purchase, imagine what will happen if you purchase well?

The strength of your portfolio should be built on the premise that you might only need to buy one great property to trade or keep as a core asset once every three years maximum.

Core Assets

By simply concentrating on fewer core assets most of the hard work is done. Investing isn’t meant to be difficult over the long term. In fact, it is designed to get easier.

Your ambition is to get wealthy, not to collect properties.  Most people I know who own ten or more properties are NOT wealthy. Of course, it isn’t for lack of trying. In fact, if I could summarise the activity of an active “collector” investor, I’d use the analogy of the “old lady who swallowed a fly.”  She chased one bad decision with another; and the result wasn’t good…  

Now I know there are plenty of peddlers determined to wrestle your wallets out of your pockets to have you buy multiple properties in a market like this. In fact, it’s almost perfect timing for these charlatans. 

Just remember that old lady!

Gavin McPherson is CEO of Oasis Property and bestselling author of Value Investing in Property, What Would Warren Buffet Do If He Was Buying Property in Australia?