The 10 lessons successful property investors need to learn

This month is special to me, I celebrate a big birthday. I won’t tell you how old I am, but it’s one of those birthdays with a zero in it. 

As I’ve been investing in property, and some would suggest rather successfully, since my early 20s. I’d like to share some of the most valuable investment lessons I’ve learnt over the last four decades.

1. Have a plan 

Strategic investors have a plan, know where they are heading and follow a proven system to take the emotion out of their decisions and give them more consistent results. They make educated investment decisions based on research and buy a property below its intrinsic value, in an area that has above average long-term capital growth and then add value to manufacture equity.

2. Take a long-term perspective 

The property market moves in cycles and in every decade there are a few years of flat or falling property prices. However, well-located real estate has increased in value by an average of over 8% per annum over the long term. 

Imagine if you could buy the house your parents bought at the price they paid 30 or 40 years ago; how many properties would you have bought then knowing what those properties would be worth today?

3. Treat your property investment like a business

The successful investors I know have grown a substantial asset base by treating their investments like a business. They do this by surrounding themselves with a great team of advisors, getting the right type of finance, setting up the correct ownership and asset protection structures and knowing how to legally use the taxation system to their advantage. 

4. There is not one property market 

While many people generalise about “the property market”, there are many sub-markets around Australia. Each state is at a different stage of its property cycle and within each state the markets are segmented by geography, price points and type of property. 

For example, the top end of the market will perform differently to the new homebuyers market or the investor segment or the median priced established property sector. And while at any time there are hundreds of thousands of properties for sale in Australia, most are not investment grade properties.

5. The crowd is usually wrong 

“Crowd psychology” influences people’s investment decisions, often to their detriment. Investors tend to be most optimistic near the peak of the cycle, at a time when they should be the most cautious and they’re the most pessimistic when all the doom and gloom is in the media near the bottom of the cycle, when there is the least downside. 

Market sentiment is a key driver of property cycles and one of the reasons why our markets overreact, overshooting the mark during booms and getting too depressed during slumps.  Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.

6. There will always be reasons not to invest 

Every year brings its own set of crises and lots of reasons not to invest. You can go back as far in history as you like and there won’t be a crisis-free year. Sure some years are worse than others, but there is always bad news and much of it is unexpected. Where investors get into trouble is that rather than focusing on their long-term goals, they see these crises as once in a generation events that will alter the course of history, when in reality they are just the normal path of history.

7. The devil is in the detail 

With so much market analysis available to us today, it’s easy to get caught up in the detail and scared into inaction. It’s better to keep an eye on the big picture and look at the property markets through a telescope and not a microscope.

8. Remember it’s about property

You’re in the business of property investment, yet at times investors forget the age-old rule of buying the best property they could afford in proven locations. Instead they get sidetracked by get-rich-quick schemes or glamorous finance or tax strategies and lose out. 

Fact is, property is not a get-rich-quick scheme. Don’t get carried away by the next hot spot or latest fad – make your investing boring, so that the rest of your life can be exciting. Warren Buffett was right when he said; “Wealth is the transfer of money from the impatient to the patient.”

9. Use debt as a tool

While many people worry about debt, smart investors use “good debt” and leverage to build their asset base. They then protect their assets by buying time though having a “rainy day” cashflow buffer set aside in a line of credit or offset account.

10. The two big drivers of property values

While in the short term our property markets will be driven by market sentiment, interest rates, supply and demand and microeconomic factors; in the long term, the value of well-located properties will rise, propelled by the twin factors that have always driven long-term property prices – population growth and the wealth of the nation. Both of which will increase substantially over the next few decades. 

Learn from these lessons and the rollercoaster ride of your property investment career may not be as dramatic. Remember, both fear and greed will send you down the wrong path, but sense and sensibility will keep you heading in the right direction – toward real estate riches.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for 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 Update blog. Subscribe today and you'll receive a free video training - The Golden Rules of Property Investment.