With so much information and opinion ‘bubbling’ around on property its no wonder I constantly come across investors who have a very complex approach to investing. Unfortunately in most cases the complexity does not come from a detailed property investing model, plan or strategy. Quite the opposite, it comes from trying to rationalize the conflicting information and results in the property market. The effect is that most investors are trying do the best they can with their available time and resource and to be ‘smart’ in their investing (applying what they have learned), but quietly hoping to be lucky.
With any investing its unlikely that real wealth will be created overnight or with a single investment/property. Fundamental to any wealth creation is the long term ‘balance sheet’ (asset/equity) growth over time. To do this we must always be ‘forward looking’. That in itself is a challenge as we have to look back at the fundamentals of different property markets to see what the key drivers were and in the context of the economy at the time and changes in the economy (such as inflation targeting from the 1990s which caused the affordability of property to increase by reducing interest rates). What caused a particular market to do well in 2001 might not have the same effect in a different area in 2011. It can be easy to miss some of the key drivers of change or their full effects and of course, we are all experts in hindsight!
To be able to pick the right locations and applying the right strategy at any given time requires us to not only understand the drivers of growth but also understand a specific area/market and make assumptions around the effect of those factors into the future. Without a sound ‘model’ which includes educated assumptions (a cat that can be skinned many ways) we will end up back in the area of ‘hoping we get lucky’.
Its very important to note that the further we try to project, the more definite we can become of our uncertainty. This is why most market predictions are only for the next 12-36 months. Its also why many marketing companies/spruikers prey on uneducated investors focusing on the ‘what has happened’ as its an easier message to sell. All of this only adds to the confusion of information out there and many investors are making long term investment decisions on short and medium term projections.
I’m always trying to identify those areas that based on my investing plan and model should provide the best returns with the least risk over the next 10 years and look in detail at the factors influencing those communities over the next 5-15 years. Of course things can change, but that is why the analysis and assumptions are critical and the capacity to maintain flexibility in your property investing business plan and strategies. Part of the considerations today are the changes happening in our economy which will have an impact on our property markets and when the Governor of the RBA is saying there is a change happening, albeit a very positive one, we need to take note.
Hope is not a Strategy
To create wealth over the long term we need to ensure we make the best decisions today or, like navigating on the wrong bearing, we can be way of target when we reach the required distance/time. So if you’re thinking of making a long term investment decision based on what has happened, what looks good in the next one to two years or without a formalised model, plan or strategy, then really you are ‘hoping’ that it will work out and ‘hope’ is not a strategy. Please, ensure you get the right education and support you need because, as in the immortal words of Bob Dylan, “the times, they are a changing.”