For a first time investor, navigating the world of property investment can be challenging. The abundance of information available can be confusing and often conflicting. Successful investors use research to make educated decisions on where they should invest to generate the strongest returns both from a yield and capital growth perspective.
We’ve found that there are two simple tips that go a long way in building a successful property investment portfolio.
- Buying at a point of opportunity
- Holding your property long term
Below we discuss what these mean, why they’re important and how to make sure you stick to these two principles.
BUYING AT A POINT OF OPPORTUNITY
This requires courage and education. People often find themselves investing in property when everyone else is doing it. The ‘herd mentality’ and fear of missing out (FOMO) gives people more confidence in their decision making. Unfortunately, in most cases, the ‘point of opportunity’ is not when everyone is buying.
The point of opportunity can be defined as the period of time where a market has not seen high levels of growth and affordability isn’t strained.
In many cases, at the point of opportunity, market sentiment is poor which makes it hard to identify the opportunity. This is where it’s important to rely on key research factors which help us to assess a market. These indicate that infrastructure spending is high, the population is growing, supply is slowing, and employment is rising. Essentially, all the fundamentals for growth are present.
To provide an example, in Sydney the ‘point of opportunity’ was 2011. At the time though, you were being told that the Sydney real estate market was in a horrible state. Predictions stated that ‘the GFC had destroyed any chance of property growth in Australia’, for many the thought of property prices rising was unfathomable. What followed was a growth period which saw average prices almost double across the city.
The wrong time to buy was in Sydney in 2016 or 2017, at the peak of the cycle when property is least affordable. Ironically, at this time sales volumes reached their peaks, the rising prices created urgency and a fear of missing out.
HOLD YOUR PROPERTY LONG TERM
The second tip is perceived to be quite simple however, can be challenging for an investor. Despite property investment being a business decision, investors struggle to remove themselves emotionally. Often this stems from the significant monetary outlay that comes with investing.
So how long should an investor hold onto their property?
Typically, a full market cycles lasts 10 – 15 years, as an investor this should be considered the minimum holding period. Of course, buying at the point of opportunity increases the likelihood of experiencing growth earlier however, property is a long-term investment. Sounds easy enough?
Well unfortunately the media are now influential in shaping our perceptions and guiding our decision making. Property is an eye-catching topic and market movements are well-documented. Forecasting and speculating property booms and busts have become increasingly common.
Often, predictions made are outlandish and fail to consider all market fundamentals and lack common sense. Many investors are influenced by this and lose sight of their original long term strategy. It’s important to maintain perspective and keep calm. The exaggerated headlines that we see today are reminiscent of the reports written in the years gone by.
Below, we take a look at some historic headlines from various points over the last 40 years.
20th October, 1985 – $1m one day, half the next
6th May, 1988 – Home buyers hit for six
Extract: ‘Sydney real estate boom has priced buyers out of the market’
9th March, 1990 – Home Prices set to fall
Extract: ‘housing, could fall substantially over the next several years’
18th May, 1994 – Home price growth to tail off
Extract: Don’t expect strong capital appreciation’
These headlines could easily be inserted into today’s newspapers predicting the same price falls. The reality though, lies in the figures. The table below shows how the markets have performed over the last 50 years.
The resilience and consistency of the Australian property markets should be undoubted. There are many factors which affect the market; however, population growth has always been the foundation for property demand in Australia. While our population continues to grow as will our demand for property and property prices will continue to steadily increase.