Why most property investors don't get rich: Michael Yardney

Fact: most property investors never get past owning one or two properties. In my experience, the two big things most property investors fail to do are:

• Have a formulated property investment strategy; and 
• Regularly review their property portfolio’s performance.

If you don’t really know why you want to build a property portfolio or how it will one day get you out of the rat race and if you don’t really know where you are heading, how will you know which properties to buy? How will you know if you’re on track and on target?

The trouble is if you don’t know where you are going, any road can get you there, but any road can get you lost. And nowhere is this truer than property investing.

What are your goals?

How much money do you want your property portfolio to produce? How many properties will you need to achieve this?

And what type of strategy are your going to follow – capital growth, cash flow or are you just going to leave it up to luck?

Currently there are over 400,000 properties on the market in Australia. Not all of them will make good investments. In fact, most won’t.

To ensure I only buy properties that outperform the market averages I use a 4 Stranded Strategic Approach:

1. I buy a property below its intrinsic value.

2. In an area that has a long history of strong capital growth.

3. I look for a property with a twist – with something unique, special, different or scarce about the property.

4. And I buy the type of property where I can “manufacture capital growth” through refurbishment, renovation or redevelopment.

While most investors read a book or two, do a little research and then buy one of the first properties they come across, strategic investors are smarter than that. They follow a system that is rooted in the real world and has stood the test of time and changing markets.

By following my 4 Stranded Strategic Approach I minimise my risks and maximise my upside as each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour. If one strand lets me down, I have two or three others supporting my property’s performance.

But it doesn’t end there. I also suggest you…

Regularly review your property strategy

While most investors just buy a property and hold it for the long term, strategic investors regularly review their investment portfolio’s performance.

When I ask investors how their properties are performing they usually have no idea. They’ve just closed their eyes, crossed their fingers and hoped for the best. It makes no sense to invest in a property and then not review its performance every year or so.

Some investors avoid the tough decisions and excuse their property’s poor performance by saying things like “it will turn around eventually” or “I don’t want to make a loss, so I’ll sell it when I can cover my costs.”

Interestingly, every year I like to ask myself some questions about each of my investment properties:

• How has this property performed over the last few years?
• Knowing what I know now, would I buy this particular property again?
• Is this property likely to outperform the averages over the next decade?
• Is there anything I could or should do to improve this property and generate a better return on investment for me?

Logically, if a property has not performed well over a three or four-year period, it’s likely to be a dud investment. The answers to these questions help ensure that I only retain top performing properties in my portfolio and that my money is working hard for me.

But isn’t it the wrong time to sell?

If due to your financial capacity you can only afford to hold five properties, you should aim to own the five best performing investment properties you can. This means that if your property isn’t giving you the return you feel it should, then it might be time to make a change either through renovations, by changing property managers or by selling up and buying a better performing investment property.

I know the market is flat and you may not get the optimal price today, but don’t wait till the market picks up because the gap between your underperforming property and better performing investments will only widen as the market improves and it will become harder and more expensive to buy the type of property you’d like to own.

Essentially the sooner you can identify and offload an underperforming property, the better. Sure, you may crystallise a loss, or have to pay some capital gains tax on the sale and then pay stamp duty on your next purchase.

I understand this may mean that you’ll take two steps back to move three steps forward; but if you treat your property investments like a business, and that’s what all strategic investors do. You’ll recognise that it’s not how much money you make that matters; it’s how hard your money works for you and how much you keep that counts.

Sure, there are lots of other mistakes you could make as an investor, but if you adhere to a proven property investment strategy and then regularly review the performance of your real estate portfolio, you’re likely to avoid the majority of blunders that other investors make.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Investment Update blog. Subscribe today and you'll receive a free video, The Golden Rules of Property Investment.