Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 16 September 2016

A framework for investing in property


Property investment seems like a minefield right now. Nothing new there, it practically always does. Yet opportunities abound as they frequently do, provided you don't follow the crowd and resolve to use a sensible strategy. But what to do and where to look?

1 - Advice, guidance, & the news cycle

Remember that as a general rule news articles are not designed to help you make smart investment decisions. In fact, increasingly the primary goal of online news articles is to optimise the numbers of clicks and eyeballs. 

Examples? In Britain there was practically a race to call a London property market collapse (again) after the EU referendum, yet within a couple of months the same journalists had reverted to housing affordability pieces. The media has called a thousand of the least zero London crashes over the past 15 years. One day...

Meanwhile, in Australia ASIC reported the day before yesterday that both the value and percentage of interest-only loans had declined significantly since the prior year as intended, yet the headlines ran along the lines of "Rising crash risk due to increase in 'Big Short' style loans" - or at least something similar to that. Clicks and eyeballs.

Consider that expert investors in any asset class are highly unlikely to discuss their best ideas in print or on television. While there are some great market commentators, and many very good ones, a number of talking heads have an atrocious track record of forecasting - and yet they return to make the same predictions year after year after year, apparently without any sense of irony.

Even the most level-headed experts are sometimes conflicted. After all none of us likes talking down the stocks we own, and nobody enjoys 'fessing up to poor calls. Most Australians are in one way or another conflicted when it comes to our property markets. Arguably those based overseas should give the most objective opinions, yet strangely these viewpoints are often dismissed as lacking local insight.

Statistics and charts can be and are easily twisted with cherry-picked start dates, dubious adjustments for inflation, dodgy y-axes, and any manner of misrepresentation.  Ponder what message commentators are trying to deliver, for "there is no arrangement of facts that is purely objective".

Be careful who you listen to, and look for advisors with a track record in investment success, not just theorising or making idle predictions.

2 - Doing the research

What approach should you take to property market research? Well, ultimately you only really have two choices: top down or bottom up!

A 'bottom up' approach might involve using your insider knowledge to identify potential opportunities in your immediate locality. Advisors might tell you that your area isn't the best bet for investing in property, but are they always right? Doubt it! And it's likely that you know more about your local market than they do (this approach not be wise to apply if you live in Borroloola).

On the other hand you may deem there to be better opportunities in another city or state - or even another country if you can deal with the foreign exchange risk - in which case taking a 'top down' approach could be the way to go. Look to buy investment properties counter-cyclically in markets with strong fundamentals, and perhaps with future development potential.

Study hard, and aim to learn from the trends of the past, but understand that the future will inevitably be different. It's no use concluding that coal mining towns aren't risky locations because prices have been strong for a few years through a once-off mining boom - small and illiquid markets almost always entail a higher risk. Use some common sense to manage and diversify your risk.

3 - Taking action

Don't waste too much of your precious time debating endless potential outcomes with all and sundry. Being right is not the same thing as making money. Ultimately, in all markets bloggers and shills don't set market prices, actual buyers and sellers do.

Whichever path you choose to follow you can be certain that someone will be on hand to tell you that you're doing it all wrong, so you must have the courage to follow your opinions and convictions.

Look for asymmetric risk and reward scenarios. In a relatively illiquid asset class with significant transaction costs this typically either means finding development projects with an acceptably healthy profit margin or taking a reasonably long term outlook.

Over the course of your investment journey you can be absolutely sure that not everything will go to plan, so it's how you respond to the challenges that will ultimately determine your results.

Finally, a bit of luck is an underrated commodity, so try to get yourself some of that - while tipping the odds in your favour by making discerning decisions, of course.