K.I.S.S. (Keep It Simple Sophisticated-Investor)
Investors over-think and hyper-analyse property investing to within an inch of it’s life. Instead of trying to answer the thousand’s of questions property investors have, it makes more sense to keep things as simple as possible. To help with this here are some words of wisdom from Warren Buffett, the world’s best institutional investor.
Warren’s perspective on investing include:
“No matter how great the talent or effort, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
Realising that property investing is a very long-term play is very important for people starting out. To truly build wealth over time you do need to be patient. We can help this process along through manufacturing equity in renovating some properties, though that only works if you have bought at a great price.
The quality of the stocks you buy can easily be compared to the quality of properties you invest in. Blue chip stocks typically perform well over long periods of time, whereas speculative stocks are much more volatile and it is all about timing you buy and sell perfectly in order to profit. In much the same way, blue chip suburbs will typically offer strong, long-term growth. Speculative real estate are mining towns and regional centres that only have one economic driver giving reason for economic growth. These are much riskier investments, and if you time it wrong the results can be catastrophic.
“Do not save what is left after spending, but spend what is left after saving.”
Changing your mentality around money management will put you into a position to buy your first (or next) property sooner. Instead of saving what is left, work out what you want to put away each week or month. Then spend what is left over. The absolute majority of Australian’s complain that they live from payday to payday, which happens when you aren’t saving money before you they step outside and start spending it.
Shifting your money management to put a portion of your earnings away each pay period is the best first step towards generating wealth. The famous (and simple) money management book “The Richest Man in Babylon” suggests to save 10% of everything you earn. Do this first before anything else. Once you start the habit you will be surprised that you will not notice the difference after a month or two.
“Risk comes from not knowing what you’re doing.”
You can’t know everything, but there are a lot of smart people in the property industry that you can talk to or work with. Gaining an understanding of the basics of property investing are paramount for any investor to be able to make informed decisions.
Working with a professional to help you invest is the best way to learn, and get a wonderful result in the meantime. Good buyers agents who specialise in investing are worth their weight in gold…if they are good. You pay for their expertise and advice, though look at it as an investment in itself and one that should pay off with a great property purchase. One other way to reduce your risk is to spread it around…
“Diversification is a protection against ignorance.”
Thanks to the internet Australia has become one large property market. Investors can buy and sell property quite seamlessly across the country without having to inspect their investments. Though most investors continue to invest in your own backyard. Buying again and again in the same market, which are all jointly affected by the same economic factors. To reduce your risk you can invest across several different markets, or cities within Australia. You can use a property in Sydney as security for a loan to purchase a property in Brisbane for example. Every city is at it’s own position in it’s growth cycle, so there are always opportunities to buy well across different locations to reduce your overall risk.
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
This is what is called the “herd mentality” where people are influenced by others to adopt certain behaviours. We see this in fashion, home decorating, and investing. Doing the same thing as the masses and expecting a uniquely spectacular result is unreasonable.
When property markets are running hot, it is all that everyone is talking about. Anyone who has already bought in is now a “genius” and it is only despair for everyone who has “missed out”. Warren suggest the opposite. Buy when others are not interested if you want to do well. By doing this in real estate you typically buy properties that offer much higher yields (rental returns versus what you paid for the property) so the weekly cost to hold this asset is a lot lower. When you are investing along with the rest of the herd, prices will rise and with that yields will drop. If you wait long enough you will miss out on the growth and be left buying an asset that costs you a small fortune to keep each year.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
In line with his last quote, Warren is talking about buying well priced investments instead of following the masses and paying top-dollar. Even better if you can find discounted investments, such as buying real estate below market value. This is not to suggest to buy distressed properties as they have been discounted. Instead stay with buying great quality property, but the opportunity lies in buying at a very good price.
In property, you make your money when you purchase. Paying far too much for a property means that you may have to wait years for the market to rise to a level where you will see a profit. Other ways this occurs is buying into investments from some developers who are paying enormous sales commissions to the investment sellers. These commissions of 6% to 10% are essentially a premium over the true value of that property. Once again it could take years for this property to increase in value to the price you actually paid for it. Buying at the right price is the name of the game of property investing.
Warren Buffett is a legend of the investing world, who made his billions over a long period of time (he is 86 years old now and bought his first stock when he was 11). His fundamentals are based on value investing, where he select stocks that trade at less than their intrinsic value. Using this methodology, along with patience and some professional help, you can invest in property like a modern-day Warren Buffett.