What's your seatbelt for the property roller coaster?
Investing can seem like a roller coaster ride as property markets go up and down, and around the country. This month, we look at strategies to ride out the highs and lows that may make the ride a little more comfortable for you. Find your seat belt and buckle up!
Investing is not a steady, single incline
As investors we would all love the perfect portfolio with properties increasing in value every year, rents rising regularly, and perfect tenants with no vacancy periods. This would be an investor’s dream but in my experience, the reality is not quite that perfect. After the start of your investing ride, other factors out of your control will affect your journey.
Experienced property investors agree the property market can be unpredictable even with all the best research in the world.
After doing nothing for many years from 2003, the Sydney market took off and has been riding an upswing ever since. How would you feel now if you sold your Sydney property around 2009 only to see the most amazing capital growth the market has ever experienced? Every capital city has experienced different property cycles of growth and decline in the last 10 years, yet median house prices have still maintained long term growth, even though it was not linear growth year after year.
So how can investors ride out these market fluctuations? Master investor Ian Hosking Richards shares his seat belt strategies in his book 90 Minutes to Property Success. Here is a summary of how he smooths out the roller coaster ride.
Diversity in LocationBasically don’t put all your eggs in one basket. Buy property with geographic diversity for exposure to different markets and property cycles at any one time. It is tempting to buy where you know and repeat your success. Sure when the cycle goes up, you are on a high. However when the cycle starts to go down, you will go into a panic. Holding these properties for many years without growth, low yields and high vacancy rates can cause stress to any investor. A diverse portfolio in different states and markets has properties in the up-cycle to balance those that may be in a sluggish or decline cycle in another area.
Long Term GoalsInvestors whose goal is to build a property portfolio for long term passive income can manage to ride out the ups and downs because they understand property cycles are not linear. They do not panic or want to sell when the market slows. They know they are in for the long haul. They ride out the bumps by balancing their portfolio and they hold their nerve until the next cycle starts the demand and growth over again.
Diversity of Property TypeHaving a diversity of properties with premium tenant appeal that are cushioned by tax benefits to stay cashflow positive can help ride the ups-and-downs of the market. Buying a variety of houses, townhouses and apartments gives you exposure to different demographics and demand in the different markets. Demographics in Australia are changing to smaller household sizes and a rise in the demand for apartment and townhouse living cannot be denied. Houses may be preferred as an investment, but affordability of apartments and townhouses combined with the demand can make these a smart investment for riding the ups and downs in the future.
SummaryInvesting in property does have its ups and downs. Riding the roller coaster can be an exciting journey to achieve your long term goals for financial independence and a secure passive income. Understanding property cycles and following investment strategies used by experienced investors may make your ride a lot more comfortable and enjoyable.