There are a whole lot of property investors in Australia. Almost 2 million, actually. But among those property investors and many others to come, there is a divide between the real and the pretend.
To the naked eye, it might be difficult to discern between a real and pretend investor, so we put together this handy guide to help figure it out.
1) When do you choose to invest in property?
Do you know what fuels a property boom? A buyer’s panic. Homebuyers and property investors crawl over each other to purchase in the next “hot spot”. They attend auctions, bid up prices, and scoff at anyone silly enough to invest in a cooler market. This has been happening since centralised markets have existed. The Dutch tulip mania of the 17th century is one of the most famous examples, where a single tulip bulb was at one point priced higher than a house. Some may laugh at the notion of buying in an overheated market, but you’d be surprised!
A real investor buys in a market when few others dare, which means market sentiment can be quite low at the time. A pretender buys after everyone else has, which means they’ve paid a premium for a low rental yield and limited opportunity for growth.
2) How do you hold your asset?
Do what you do best, and let others do the rest.
I’ll never forget first learning of this pro-delegation quote immortalised by business genius, Peter Drucker. One of the biggest mistakes a property investor can make is managing their own asset. That is, selecting tenants, attending to repairs, collecting rent, etc. This is because it’s extremely unlikely they’re the best person for the job. Not just because property managers are professionally employed full-time to manage similar properties nearby, but also because of an irrational, emotional attachment a property investor often has with their asset.
But managing their own property isn’t the only mistake pretenders make. They obsess over short-term market trends, do their own taxes and refinancing, feud with their tenants over superficial issues, neglect defects (which create larger defects) and avoid hiking up rent until the gap between them and the market rate is too large. Undoubtedly, many of these things lead to higher tenant turnover and a less viable asset.
A real investor is vigilant, but not over vigilant.
3) At what point do you sell your asset?
Perhaps the biggest pretender mistake of all is selling your asset for the wrong reasons. According to a 2019 Pain and Gain report by CoreLogic, somewhere between 5 and 15% of properties are sold at a loss (depending on the market cycle). If you look at it the other way, somewhere between 85 and 95% are sold for break-even or gain. They’re some good odds! Almost exclusively, people selling at a loss do so for one of two reasons:
- They didn’t hold the asset long enough (the median hold period for houses sold at a loss in Melbourne is just two years)
- They sold at precisely the wrong time of the market cycle – the opposite of choosing the right time to buy
So why would a pretender hold their asset for such a short time or sell at the wrong time? Because they either got impatient or spent too much time speculating on the market based on things they saw on TV and read on the internet.
A real investor knows that their asset needs to be held as long as possible, perhaps never selling it at all. That way, they build a large asset base which compounds year after year to their retirement and beyond. Some families in Great Britain have been doing this for generations!
So, what kind of investor are you? Real or a pretender?
If it’s the latter, what are you going to do about it?