There are 2 types of property investors. An overwhelming majority of investors exhibit a specific behaviour which produces results that are well short of their potential.
There is no law that says one must invest – it is a discretionary action.
But those who choose to do it are motivated by a goal to enjoy a better-quality future lifestyle.
Doing as much as one can to enhance the return on their investment brings that primary goal closer to reality.
Making a conscious decision to become one type of investor over the other can produce double or triple the total return on investment.
Let’s look at how investing the same amount of money, at the same time, has potential for significantly better results and a philosophy that involves less risk than the other investor type takes (even though they may not realise it).
Comfort-zone investors are those who are anchored to their own backyard. They typically represent 95 percent of Australia’s 2.3 million property investors.
With Group Think as their primary knowledge source and a DIY ‘skillset’, the decision regarding what the comfort-zone investor puts their money into is made through an incredibly narrow-minded focus.
By default, they only ever consider 1 out of a possible 400 individual townships – their hometown.
They mistake neighbourhood features and benefits for market fundamentals and have no visibility whatsoever of leading indicators.
Their decision is dominated by their own confirmation bias, and they obsess about the bricks-and-mortar.
The end result is an investment property purchased in their hometown and in a neighbourhood that they feel ‘comfortable’ with.
This includes investors who have ‘converted’ their former family home into a pseudo investment property by simply moving out and putting a tenant in.
The investment performance for comfort-zone investors relies entirely on the pot-luck associated with the 1 of 400 townships that they call ‘home’.
Be honest, these are pathetic odds!
Intelligent property investors are those who truly embrace the primary purpose of the discretionary action of investing.
The small few who choose to belong to this investor type has nothing to do with whether they earn their income as a general manager, a graphic designer, a gynaecologist or a garbage collector. General intelligence and financial intelligence are two completely different things.
The 5 percent of Australia’s property investors who can lay claims to being an intelligent investor remain focused on the primary objective of maximising financial performance, as opposed to simply buying a property.
These investors fully embrace the Golden Rule of all financial decisions [explained here].
To stop being anchored and narrow-minded, they work on improving their mindset such that they become very comfortable with being a borderless property investor.
They review real estate potential through the lens of financial instrument.
They do this by removing all personal biases and preferences, they ignore the herd and make decisions by following a very structured process which is supported by formal studies and evidence.
The intelligent investor has a healthy appreciation for the extreme complexity of property markets and the incredible diversity of fortunes across this big country with 400 townships. More often than not, they engage expertise.
CASE STUDY
After deciding that they wanted more for their future than what superannuation and a taxpayer-funded aged pension will support, Sydney residents, Bill and Mary, decided to invest in real estate in January 2017.
SCENARIO #1
If they were a Comfort-Zone Investor, Bill and Mary would have purchased an investment property in their hometown at the (then) Sydney median house value of $970,000.
For the purpose of this exercise, we’ll assume Bill and Mary completed the purchase using a 10 percent deposit and 90 percent investment loan.
The interest rate on their loan was 4.5 percent and they received median value rent for 48 of 52 weeks each year. After provision for other general expenses such as insurance, city council rates, maintenance and property management, the property produced a (pre-tax) cash flow shortfall of $16,000 each year.
Over the following 5-years, Sydney’s median house price enjoyed 41 percent capital growth. While the cash flow situation meant they had forked out $80,000 of their own money over those 5-years, Bill and Mary had a handsome $400,000 increase in their asset value.
On face value, if you met Bill and Mary and they had mentioned that their investment property had increased by $400,000 in just 5-years you could be forgiven for thinking ‘…gee-whiz, what a great decision to invest in Sydney…’
But was it a good idea to put lots of eggs into one asset basket, especially considering they already had a lot of capital tied up in the same market via their family home?
Was the 41 percent growth a reflection of good market research, or was it pot-luck that their hometown enjoyed a good run?
The evaluation of any investment performance is always relative to what else could have been achieved.
SCENARIO #2
If Bill and Mary chose to become Intelligent Property Investors, they would have first stood back and objectively reviewed the fundamentals of each of the 8 capital cities and remained just as open-minded to the 400 regional townships.
Upon doing that, they would have given the Golden Rule the respect that it deserves.
For a combined total investment of $945,000, Bill and Mary could have purchased three (3) solid houses and reduced their risk by spreading the capital across three different cities in different states.
Real examples of locations strategically chosen for Propertyology clients are Orange NSW ($360,000), Bendigo VIC ($315,000) and Launceston TAS ($270,000).
With the same assumptions as used in Scenario #1, these three properties would have produced a combined annual profit of $7,200 per year.
Most importantly, the skilful assessment of market conditions that were drawn upon to select these specific locations resulted in significantly better rates of growth.
The dollar-value increase of each individual property after 5-years might appear to be inferior to Sydney’s $400,000 referred to earlier.
But, just as an experienced retail shopper would look at (both) the ticket prices and the volume of product contained within the packet, intelligent investors understand that an accurate assessment of return on investment is determined by percent value growth.
Spectacular rates of capital growth over the same 5-year period in Orange (89 percent), Bendigo (78 percent) and Launceston (104 percent), equates to a combined increase in asset values of $845,000 (or 89 percent).
Scenario #1 and Scenario #2 involves investing almost the same total value of real estate ($970,000 versus $945,000) at exactly the same time. But the annual cash flows are quite different ($16,000 loss versus $7,200 profit). The total capital growth from Scenario #1 is less than half that of Scenario #2 ($400,000 versus $845,000).
Fortunately, property markets can be very forgiving. So even a middle-of-the-pack performance can sometimes still be handsome (and sometimes unattractive).
But let’s circle back to the primary purpose of investing and the underlying goal for doing it.
Anyone can buy a property in their hometown. One might liken it to an expensive version of retail therapy for a tenant to enjoy using.
Buying real estate for financial gain requires deep thought of various considerations, skilful analysis of all locations, complimented by separate skills and tried and tested quality controls to execute the decision.
Isn’t your future too important to invest in pot-luck?
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