The four most dangerous words in property investing

When I was still a novice investor, one of my early mentors taught me that the four most dangerous words a property investor could say was “this time it’s different”.

Unfortunately, in my early days of investing I ignored his advice, to my detriment, as I found that history does in fact repeat itself.

The best way to explain what I’m on about is to look back to earlier this year as many of our property markets boomed and two extreme opinions came out. One group was suggesting we are in for a long boom and another was suggesting the property markets would implode.

At the time I made it clear that my view was that the extremists, in both directions would be wrong.

Why? Because history does repeat itself and having invested (some would say reasonably successfully) for over 35 years, I’ve learned some lessons.

Probably the most important lesson I have learned is to never get too carried away when the market is booming or too disenchanted during property slumps. Letting your emotions drive your investments is a sure-fire way to disaster.

To ensure you don’t get caught by the changes currently occurring in our property markets, let’s look at five big lessons I’ve learned over the years:

Lesson 1: Booms don’t last forever

During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn. Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.

Let’s face it, while the general economic news is still generally positive today, we know that over the next few years the buoyant market conditions will be followed by a property bust and then another boom.

Just look at how markets have performed over the last 18 months – some areas have boomed and are now slowing down and other property markets have languished.

Going forward over the next decade we’ll have another recession – I’m not sure when but we have one every seven to 10 years and we’ll most likely have another Depression one day – because history repeats itself.

The lesson from all this is that even as you take advantage of our booming markets, get prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximised.

Lesson 2: Beware of doomsayers

As long as I have been investing, I remember hearing people with excuses why property values will plummet. However, in that time, well-located properties have doubled in value every seven to 10 years.

Fear is a very powerful emotion, and one that the media use to grab our attention. Sadly, some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.

Lesson 3: Follow a system

Smart investors follow a system to take the emotion out of their decisions and ensure they don’t speculate. This may be boring, but it’s profitable. Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But many investors without a system found themselves in financial trouble when the market turned.

Warren Buffet put it succinctly: “You only find out who is swimming naked when the tide goes out.” In other words, if you aren’t following a system that works in all market conditions you will be caught naked when the market changes.

If you prefer to have consistent profits and reduced risk, follow a proven system.

Make your investing boring, so the rest of your life can be exciting.

Lesson 4: Get rich quick = get poor quick

Real estate is a long-term investment, yet some investors chase the “fast money”.

You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.

They are often influenced by the latest get-rich-quick artists, who have a great story about how you can join them and become stupendously wealthy. Their stories can be very compelling, even hard to resist. They often pander to the wishes of people who would like to give up their day job to get involved in property full-time, but in reality it takes most people many years to accumulate sufficient assets to do this.

Patience is an investment virtue. Warren Buffet said it right when he explained that: “Wealth is the transfer of money from the impatient to the patient.”

Lesson 5: It’s about the property

You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations.

Instead they got sidetracked by glamorous finance or tax strategies, and some lost out.

Smart investors do it differently. 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, creating some extra capital growth.

These are just five of the many lessons that I have learned over the years. What are the big investment lessons you have learned? Please leave your comments below.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.