If we define ‘investment’ as the laying out of money today, to get more money back later, it follows that property investors should be focusing on this simple, centuries old concept. How much money do you need to commit to the deal? How much money will come back each year? How sure are you of receiving this cashflow? What forces, over which you have no control are going to result in problems?
I have found that most investors are not ‘investing’ at all.
If you were to ask an investor why he purchased a property the reasons given will always be sound ones. “I’m buying a solid asset for my kids” he will say. But we should heed the wise investor J.P. Morgan who once said “a man always has two reasons for doing anything: a good reason and the real reason.”
An investor will never tell you he purchased a property to keep up with his well heeled brother in law or because of feels stupid for having missed the last boom, but these powerful forces are at work and mainly subconsciously which makes them even more dangerous.
From a logical point of view it’s quite odd that so many people are involved in property who do not value their own time and energy that they freely commit to the enterprise. Similarly, gross returns are used to decide whether to invest without much detailed consideration of long term interest rate changes, voids, tax, maintenance issues and all of the other ‘frictional’ costs of owning property that eat into cashflow. I would guess that most investors would wind up with a loss making investment in real terms once inflation has been factored in.
It is also quite amazing how short the memories of investors are. Here are some of todays headlines (late March 2014):
“'My property is going to be my pension:' Buy-to-let landlords snap up homes as mortgage rates keep falling”
“Sudden rise in property prices stoke new fears of housing bubble”
I saw the same types of headlines from 2005 to 2007…It has only taken six years to forget the lessons of the last boom and bust. When interest rates go up (and they are likely to soon), it may well be time for another lesson if the last one didn’t sink in properly.
So what’s the solution? Most investors would do much better over the long term simply investing in a low cost index fund and sitting tight. For no work whatsoever an investor would earn a good return with transaction costs as low as 0.4% per year and since over the long term the stock market has returned around 8%, the return would beat most property investments too.
Only committed investors with a business like attitude to investing should be investing in property right now. A significant amount of time is needed to find and buy properties at attractive prices. The hard work doesn’t end there. A good team and robust systems are then required to manage the property for superior returns over the long term.
Taken from Parmdeep Vadesha's blog http://www.parmdeep.com/property/property-is-an-odd-investment/