Last week I received an interesting email from a former student who was a member of one of my mentoring groups, thanking me for the updates and asking me a really interesting question.
I’ll repeat it for you here:-
“I’ve been hearing through a few people that an economic crash is facing us later this year or early next year. What do you think about this prediction? Some good friends of mine are “cashing” up in preparation for what they feel is an inevitable crash. I’ve also just received an email from the people who manage Robert Kiyosaki and during his upcoming presentations in Sydney and Melbourne, he will be talking about the crash he believes will be happening later this year. I was just interested in your opinion as I remember you predicted something was amiss just before the last financial crash.”
When you invest in real estate you are no doubt hoping for strong gains in value over time. But what if you could improve your chances of making a quick gain early on – a fast improvement in value that will help propel along your wealth portfolio?
The ideal situation would be for you to be able to invest in an area that is either already growing fast or is about to do so – a property hotspot. It is not always possible to pick these suburbs with complete accuracy and timing, because the statistics we use can be three to six months out of date by the time they are collated and we can analyze them. And a hot spot that is identified using data that old, could conceivably already have started to cool down.
When we buy real estate to hold for the long term, we must factor in earning a rental income stream from the future tenant. Not only do we need that to support any borrowings we may have against the property, we also need to maximize the total return on the investment – which will include any capital gain, income from rent and any tax benefits.
It might sound trite, but my experience is that investors don’t often think overly much about the needs of their future tenant – someone who in fact will become your de-facto financial partner in the months and years to come. They tend to think about the great deal they just got, rather than how it fits in to their portfolio or strategy or if it will be desirable to a tenant.
I spent a lot of time driving around looking at property. Over the weekend, I noticed a number of large prominent “For Lease” signs on homes that fronted busy through roads.
I remember being fascinated with fire as a child. I loved scratching the red-headed match against the rough side of the box and watching it burst in to flame, producing heat and energy. I thought it was some kind of magic trick. At least until the first time I burnt my fingers. Then I knew it was real.
As I grew up I began to understand that fire was life and fire was death. It bought life to those who were cold in winter and death to those caught in its untethered path. I discovered fire was a source of power that could be either friend or deadly foe.
It is often said that the most important factor in successful real estate investing is – location, location, location. And in some respects that is correct. Though there are so many other factors that come in to what can affect real estate values – like supply and demand; unemployment; average incomes; proximity to infrastructure like transport, shops, schools, medical facilities; population growth including natural births & immigration. It can be quite a long list of elements to consider.
Most commentators ignore what I now believe to be a critical factor in the pricing and relative value of real estate. The lifeblood of building a property investment portfolio is money. That is – money you borrow to buy houses, apartments, townhouses or other income producing real estate. If there is plenty of money available at cheap prices (low interest rates) people will borrow to buy and drive prices up. If the money supply is tight and fewer people can borrow to buy, the assets prices can no longer be supported.
In the course of doing what I do, I review vast amounts of economic and investment information from all over the media – social, print & digital – in fact I invest several hours a day on this. I want to be the best investor I can be and sorting through the piles of opinion, fact and material is critical to having an understanding of what is happening in our financial world.
Late last week, I read an interesting article from one of Australia’s most respected economists, Mr Saul Eslake. In it, he says “Negative gearing can’t be equated with standard business tax practice, and is not allowed in many countries.” Mr Eslake notes that in a speech published in 2005, our current Prime Minister Malcolm Turnbull, described “negative gearing as a form of ‘tax avoidance’, one of the few open to PAYE and other ‘unincorporated’ taxpayers.”
It is very clear that the Australian real estate party is over – for now at least. Many investors are wondering where to direct their focus now, since making money in property is no longer about just buying something – anything, and hoping for the best.
Over the past decade you could pretty much just buy in your own backyard and wait, earning capital growth by default and thinking you were a smart investor. It’s going to take a lot more than that in the next decade. And it is likely you won’t be investing just in the city in which you live – there may be better investment opportunities for you elsewhere. It is also inevitable that you will be building a diversified portfolio of short & long term investments, having some oriented at capital growth and others at income. This is the next generation way of investing.
At the age of 19 I decided that I wanted to be rich and that meant being a millionaire. It took nine years to achieve the goals and I only discovered it by accident. I was filling out an application form for a loan and realized that my assets minus my current liabilities equaled just over one million dollars. At that point I thought I had it made. I mean being a millionaire was the peak in wealth wasn’t it? It was what everyone wanted to be?
The very first book I wrote was called “It’s Easy to Be a Property Millionaire” and it sold in the tens of thousands, so I guess a lot of people just like me were out there all striving to become a millionaire. It was presumably because they wanted a better life and that number – a million dollars, seemed to be the magical goal, once reached, would guarantee the life of your dreams.
Last year, the Australian Prudential Regulatory Authority (APRA), at the behest of our Federal Government, issued instructions to our major lenders – pull back on your investor lending. APRA and the Government were rightly concerned about the growth in real estate prices over the last several years, particularly in Sydney & Melbourne.
The Federal Government wanted to lower interest rates to support the broader economy, but they knew they could not do that without risking sparking yet another run up in property values. They decided the best way they could slow things down was to squeeze the supply of loans, yet they chose to do this only for investors, who got the blame for pushing up real estate values. If they were really serious, why didn’t they have the banks slow down all lending?
I have enjoyed sharing with you an ongoing series about some of the most successful people on the planet, including Richard Branson, Mark Zuckerberg, Aristotle Onassis and Andrew Carnegie (look back through my website for these stories). I haven’t yet written about another of my heroes – an Australian – Robert Holmes a Court (though he was born in Johannesburg!)
While it is not certain, there are many who believe that Robert Holmes a Court was Australia’s first billionaire. Holmes a Court rose to national prominence in the heady 1980’s business boom, alongside characters like Kerry Packer and Alan Bond. His journey from South Africa to Perth to build his corporate fortune is one that fascinated me as a teenager.