Three rules of Property Investment
Three things property investors must do to separate the wheat from the chaff: Terry Ryder
By Terry Ryder
Thursday, 13 September 2012
Confusion is the theme of most questions I get from property consumers.
People seeking to invest are befuddled by two major factors: conflicting advice and media misinformation.
The greatest area of confusion relates to where they should buy. Capital cities v. regional centres. Hill change v. sea change. Inner city v. outer suburbs. The lure of high returns and capital growth in mining towns, against of a chorus of “the mining boom is over” media sound bites.
What do you believe? Or, more to the point, who do you believe?
Wannabe investors have an unerring ability to accept advice from all the wrong places, including family members, friends with strong opinions, professionals who aren’t property specialists and advisers with vested interests in pushing them in a particular direction.
Here’s my three-step process for sorting through the static and finding some wheat among the chaff.
- Stop reading newspapers
- Challenge advisers
- Do your homework
People usually think I’m joking which I tell them that Rule #1 for successful property investment is to stop reading newspapers. I’m deadly serious.
Newspapers contribute nothing to the process of information gathering for property investors. They just fill people’s heads with misinformation and negativity. They’re a core reason why consumer confidence is so low in Australia.
Despite everything people know about the pessimism and beat-up tendencies of newspapers, they still tend to take what they read as fact. They absorb headlines and five-second grabs on television and it becomes part of what they think is true.
When it comes to information about real estate, newspapers are deadly. Most of the real estate content of metropolitan papers is written by people with no credentials. Much of it comes from a press release re-write, so propaganda is recycled as fact. And the recycling process is handled by non-experts.
This week’s data on home loans is an example. The reality depicted in the ABS figures is that the number of home loans approved this year has generally been higher than last year. The latest month for which data is available, July, showed a 2% improvement over July last year.
That’s been the trend all year: moderate improvement over 2011.
But newspapers across Australia reported it as a decline (July was marginally lower than June), with comment that the figures were evidence of market weakness. Several articles featured the word “crisis” prominently.
Why did they report it that way? Because the builder lobby groups, such as Master Builders Australia and the Housing Industry Association, pumped out their usual pessimistic press releases, and most newspapers ran with that. Journalists will always be attracted to a negative angle, no questions asked.
If you’re serious about investing, you need to stop reading this rubbish. The internet, which has many specialist websites with quality information (yes, including mine, so feel free to challenge me), should be the primary tool for people seeking real estate education. Newspapers, increasingly, are redundant.
Rule #2 is to challenge anyone presenting himself/herself as an adviser. Firstly, do they have any credentials to speak on real estate? I find many people confuse celebrity with expertise. The assumption is that if someone’s appeared on TV she/he must be an expert. Often, they’re not.
Advisers also need to be grilled about their vested interest in the advice they’re giving. Many professionals, including accountants and financial advisers, are receiving big kickbacks from developers for steering their clients towards off-the-plan apartments.
Whenever an adviser suggests investment in a particular market sector, consumers need to dispute that too. Quite simply, ask for evidence. Ask them what research they have to show that this is the best place to buy. If they can’t produce any, get another adviser. (As I said earlier, feel free to challenge me on my views.)
One of the great furphies is that you must invest in “prime” real estate. Prime is usually defined as the inner-city suburbs. Anyone with the gift of the gab can mount an apparently plausible argument for the supremacy of the “quality” suburbs.
That’s until you look at the figures. Most of the elite suburbs of our major cities have miserable records on capital growth. They’re highly volatile markets that seldom make money for investors.
This is something I’ve research repeatedly over the years. With rare exceptions, the cheaper areas outperform the expensive ones on long-term capital growth.
The recently reported sale of a Sydney mansion in Vaucluse is one of many examples. The “Hollywood-style” mansion sold for a reported $11.75 million. The vendor had paid $8.5 million in 2002 and, at face value, it looks like they made a few million. But the capital growth was an average annual rate of just 3.14%.
That’s a similar outcome to my research into re-sales of homes in Wolseley Road, Point Piper, regarded by some as the most prestigious address in Sydney. The average capital growth rate was 3% a year, among the worst in the nation.
Next time someone recommends one of these “prime” locations, challenge them. Ask for evidence to support the claim that “quality” property out-performs. The figures will show the opposite.
At the end of the day, it all comes down to Rule #3: investors have to do their own research. Anyone who goes into the expensive business of property investment based on someone else’s advice, without doing any personal legwork, deserves the poor result that so many people get.