Allow me to quote Warren Buffet.

Rule number 1 – Never lose!

Rule number 2 – Never forget rule number 1!

It is far easier to follow or apply those rules in the share market as investors or their investment consultants always run risk analysis without emotions. The best profitable share or the one with the most dividends distribution has the best likelihood to be selected.

But for some reason, we often buy our real estate investments with emotions. We do not follow proper risk management and we usually get biased information.

The real estate trap

Let’s face it, when we seek for a property we should look for prices and bargains. The reality is we put more attention to the content of the ad, the photos and outstanding finishes.

When we participate in a property seminar or meet with an investment consultant we get inspired by wealth stories, past statistic data and a beautiful fancy property that matches our dream property.

We never run a proper risk analysis on the data that was presented to us to get real figures and projections or we do not have the right tools to assess the risk associated with the asset. In this sense, we have already broken Warren Buffet’s rule number 1.

If we can summarise this, out of a combination of 15% of investors that have 1 to 4 properties, about 90% of them fail when:

  • They get too emotional about their investment.
  • They skip rule number one and blindly follow the advice obtained from inspirational wealth talks.
  • Non-reliable data make them believe it will be a successful investment.
  • They rely on a property investment firm with the wrong strategy of how to make money.
  • They depend only on long term success and forget the first cycle of the property market that has a significant effect on their wealth.

Case example

We go to a property workshop that promotes a fancy building with water views at the Gold Coast.

The property workshop provides us with:

  • The supported research that indicates a massive infrastructure plan in the next few years, such as a train station, a new road, big Kmart.
  • Another supported research that population growth is going up and so does the interstate migration.
  • The marketing support that compares the prices of QLD/Gold Coast to the costs of Sydney, which of course point on affordability.
  • A rental appraisal that with today’s market condition we will likely achieve 4.5 to 5.2% in gross rental yields
  • Inspired by wealth stories and individuals success, with a long term portfolio building that will secure our future.

At the end of the workshop, we end up reserving, signing and getting into the deal quickly.

Buying real estate investment according to the above case is a formula to lose money, and this delays your chance to achieve the next investment asset and a future net asset base.

Why won’t we take all the case above and validate the risk and the return with proper risk management and independent advice?

– Every suburb across the country has a different economic factor that associates with different risk and every asset-class is associated with different risk and return.

  • A new strata two-bed unit with water view in a Gold Coast suburbs can cost between $600 to $800k, while in Sydney western suburbs, a townhouse or small freestanding house can have the same price.Another example we cannot compare a boutique two-bed at Manly beach which cost more than $1.2m to the same two-bed at Gold Coast, Surfers Paradise.

– New infrastructure is always a good sign for the area development and transformation.

  • However, those attract developers and many stakeholders that can put the area in the extreme oversupply for this particular asset class.

– Population growth is indeed an essential factor.

  • Interstate migration indeed increased in the past few years in QLD major CBDs, but if we look closely on the numbers and on the job creation supply, we can see that it is only a small growth.
  • When we compare the population growth in Sydney or Melbourne, we will realise that this point is not in our favour.

– Gross rental and tax returns

  • Gross rental return of 5% with a strata unit and a fancy one is usually about 3% or even below that, which in most cases lead to a shortfall with mortgages, property management and other holding costs.
  • Tax return in most of the cases, especially with average salaries will not even reach break even.
  • As we all know, real estate is a long term game and inspiration is useful in order for you to get started in the investment process. However, we need to have a roadmap that will correlate with your risk profile to build a significant property portfolio.
  • I see it as a puzzle. With our effort to save and build more assets, we must make sure that each part of the puzzle is a sound investment, reasonable and has the most likelihood to attract capital every year and in the short term, to maximise the ROI over the long term.

– Substantial ROI can be achieved only with proper risk management that you use for all your diversified asset classes.

  • Real estate investment does not involve guessing the present and guaranteed future capital. It is a pure analytic science if you want to differentiate your property portfolio success from the average.

As a buyer’s advocate, we aim to help investors and OCC to achieve wealth with every property selection through risk analysis, integrity and years of experience.

Investinproperties implements risk and returns based approach for years now. If you already work with your strategist or a property professional that you trust, I recommend validating his statements and property risk. This action is the only solution today that can guarantee the significant success of your property and your portfolio.