People all over the world are fascinated with property. People dream of owning an investment property or even a property portfolio and living off its income. But how many achieve this goal and retire early to pursue their ambitions? My guess is not many.
When it comes to buying property off-plan, the deck is stacked against small property investors, today. Information and timing are critical to generating wealth, but access to information is out of reach for all but the privileged few. Without this information, small investors can’t make informed investment decisions.
Today, property investors get bombarded with fake news about investment opportunities crafted by those who have the most to gain by selling them. Overwhelmed by inaccurate and misleading information, most small investors make poor investment decisions buying property and ultimately paying far more than they need. They are lining the pockets of property agents and marketing companies who prey on their lack of knowledge. It is not until the property completes that they realise they didn’t quite get what they bargained for.
Today’s successful property investors
I have noticed several different things about the winners and the losers in the off-the-plan property market in my career.
It was the losers who always seemed to buy a property with the herd. They bought late in a marketing campaign or late in the market cycle. They paid 20% more for the property than the winners. They did not give thought to the market or what they were buying. They just had a sense that values would always be going up.
These investors believed the research produced by large property agencies. Have you ever noticed this research always seems to suggest that now is an excellent time to buy? No matter how bleak things look in the economy, this research always seems to find ‘silver linings’ highlight the hidden diamond in the rough, which would buck the trend.
When they tried to let their new property, they found out that it would not rent for what they had been promised. Not only was there not a queue of merchant bankers and doctors to rent their flat, but the rents were about 20% less than what they expected.
Today, the property investors who win are different. They are sceptical and form their own views. They always have a sense of reality and know when is the right time to buy.
These investors had:
- Access to high-quality market information: Large property agencies thrive on making market data challenging to obtain. But how can you make a sound investment decision if you don’t understand what a good deal is?
- An understanding of the fatal error of paying today for tomorrow’s growth: As an investor, you need to be cognisant of what today’s reality is and what risk you are taking. More importantly, you need to know how you will share in that risk/reward equation.
- An uncanny sense of the cost of excessive marketing campaigns: Market access costs are the enemy of both investors and developers. Expensive brochures and substantial marketing campaigns are excellent for large agencies to increase their profile and line the pockets of those in the media industry. However, they serve no real purpose. They simply increase the cost of the property and ultimately dilute returns for investors.
- A well-thought-out plan for buying and when they would get the maximum purchasing power from their capital: Most investors do not have a plan. They buy real estate simply because it seems like a sensible thing to do – and it is. But why are they buying it, and to what end? Is it a long-term investment, or is it part of a broader plan to develop a portfolio? Are they buying for yield or capital appreciation? How should the property be owned? At what point in the development and market cycles is the right time to buy? These are essential questions that you must answer before signing on the dotted line.
- Strong networks: The investors were in the market, and people in the property market knew who they were. That does not mean they were constantly buying – they just had their finger on the pulse. They understood that the most cost-effective way to purchase real estate is not in the open market. And the only way that they could do that is if the people in the market selling property knew who they were and how to contact them. The agents knew that they could go to these people early in the sales and marketing campaign (when the best deals get done) and sell to these people quickly and quietly because they knew they would buy – at the right price!
- Clever ways of buying a lot of property at once: This is the most important factor. The investor got their friends and networks to pool together and leverage the economies of scale they could create. As a developer or an agent, there is nothing better than de-risking your marketing expenses by doing early deals, especially if they are large, even if this means you need to give a considerable discount.
I have developed these investor behaviours into 6 Investment Principles, which all successful property investors follow in the buying and market activities:
- Have a plan: They have a clear plan for why they are purchasing a particular property and how it fits in their long-term strategy. Empowering them in negotiations as they understand the impact of a decision on their plan and, more importantly, when to say no to a deal.
- Get market information: They have access to high-quality market data and make decisions based on economic reality rather than highly biased property agency research reports.
- Have a network: They have strong professional relationships and networks, they nurture them over many years, and they use them as a sounding board to sense check decisions.
- Understand mis-priced risk: They have a detailed understanding of how the development cycle works and, more importantly, where the pain points are for developers; they leverage these to create win/win deals where they better share in the risk and reward equation.
- Recognise excessive market access costs: They understand the actual cost of overly expensive sales and marketing campaigns. They do not buy via these because they realise who ultimately pays for it – the purchaser.
- Buy in bulk: They find clever ways to leverage economies of scale created through buying in bulk. It may be easier to do than you first imagine.
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