Why Should You Always Follow The Money?

If you are a real estate investor, I am reasonably certain of two things. One, you are doing it to make money. And two, you are doing it because you want to create the best quality of life you can have in the shortest possible timespace.

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To do that, you need to follow the money. And that can happen on several levels.

Most people who invest in property, buy their first piece of real estate in their home city. And to follow that, the small percentage of investors who go on to purchase multiple properties, usually also buy in their own backyard. Then they perhaps will renovate or otherwise improve the properties and settle down to wait for capital gain to add to their wealth over time. That is usually a pretty good way to build wealth over a ten to twenty year investment period. The challenge with that passive strategy is that your home city may not be the best place in the country in which to be investing at any given time. Ideally you want to be investing in to a location that is entering its upswing in the cycle, bringing immediate capital growth, which can give you an enormous advantage in building up your capital more quickly than waiting for the cycle to come to your home city.

In over thirty years of observing the Australian property markets, I have noticed that there is an overriding cycle to the way values tend to move around our country – a mega-cycle. While there are lots of other factors which can affect this cycle, you can be reasonably sure that values will move in this fashion.

Sydney is the city that has the biggest population – some 4.6M people – and it is here that the “Australian” mega-cycle begins. As values move upwards, this triggers the next wave in to Melbourne, Sydney’s erstwhile rival, Australia’s second largest city by population at 4.2M and recently voted the world’s most liveable city.  Melbourne prices rise and begin to approach those of Sydney. Then buyers start to investigate Brisbane, Australia’s third largest city at 2.19M people, because the real estate looks cheap. Quite a few home owners in Sydney & Melbourne also look to Hobart, since they can now sell their big city properties and buy two or three in Tasmania, retiring and living off the rental income. Shortly after Brisbane begins it move, canny investors begin to look to the West, where Perth (1.9M) homes now look positively cheap by comparison to the Eastern seaboard. Perth values move upwards, which has investors now looking across the Nullabor to Adelaide (1.2M) where the houses are about the cheapest on the mainland with usually strong rental yields. Others then begin to look at Canberra, though that city can wax and wane in value, according to which political party is currently in Government. If the current party has a policy to expand the size of government, Canberra performs well. Somewhere in the middle of the mega-cycle, usually either just before or just after the Brisbane cycle, the Gold Coast takes off – but be wary here. The Gold Coast cycles are the quickest of all – they run up fast and fall faster – your timing must be impeccable.

What if you were aware of the mega-cycle, could ascertain where we were in that cycle and then invest in to the next city in the value wave? That would without doubt improve your returns immeasurably. Rather than having to wait for the next cycle to arrive in your city, the property you just bought would be enjoying capital gain in a much shorter timeframe. And you would reach your wealth targets much more quickly.

The challenge is knowing how long these single city cycles take – and in my experience it can vary from 12 months to three years or more. The mega-cycle can take seven to twelve years, sometimes more.

In my opinion we are halfway through the Brisbane/Hobart cycle, so while I don’t think it’s too late to invest in to Brisbane/Hobart homes (not near city apartments), over the next six to twelve months the next logical space to look at will be Perth. That is counter cyclical because the current Perth market is still weak and may be for another six to twelve months. But the best time to buy for the long term is when there is “blood in the streets.”

There are so many other factors that can affect the way the mega-cycle works. On the demand side – things like interest rates, inflation, employment opportunities, wage levels, immigration.  On the supply side, availability of finance, taxation of land and planning approval times and constraints can all change the way a cycle times.

The biggest single factor outside of these macro-economic measuring points that can change a market factor is the Government. They can increase taxes, provide taxation benefits and pour millions and billions in to infrastructure. All of these things can distort the mega-cycle and change the “normal” flow of value increases. For city specifics though, follow the (Federal and State) Government’s expenditure on new motorways, freeways, airports, railways, ports, bridges, schools, hospitals – anything that can accelerate economic growth and employment opportunity. This can have explosive effects on real estate prices both in the city but specifically nearby to where the money has been spent. If you are aware, you can ascertain all of this money news via the media – while filtering out the negative white noise of course!

To make more money, follow the money.

If you do, your chances of reaching financial independence and freedom improve dramatically. While the time to do so lessens considerably.

And that is a good thing, don’t you agree?

Please note: I reserve the right to delete comments that are offensive or off-topic.