Property markets around Australia have been buoyant for some time now and memories of the previous few difficult years in real estate have become a faded memory for many of us.
However, it would be a pity to have lived through those challenging times without learning some lessons so that we are not destined to repeat the pain.
So what did you learn from the last property downturn?
Probably the most important lesson we can all learn is to never get too carried away when the market is booming or too disenchanted during property slumps. Letting your emotions drive your investments is a sure-fire way to disaster.
To ensure you never get caught again, let’s look at 5 big lessons I’ve learned about property booms in my close to 40 years of investing.
Lesson 1. Booms don’t last forever
During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn.
Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.
Let’s face it…
While the news regarding property is positive today, we know that over the next few years the buoyant market conditions will be followed by a property bust and then another boom.
And over the next decade or two we could even have a recession (we haven’t had one since the early 90’s) and we’ll most likely have another depression one day.
The lesson from all this is that even as you take advantage of our booming markets, get prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.
Lesson 2 – Beware of Doomsayers
As long as I have been investing I remember hearing people with excuses why property prices will stop rising, or even worse, why property values will plummet.
However in that time, well located properties have doubled in value every 8 to 10 years.
Fear is a very powerful emotion, and one that the media used to grab our attention. Sadly some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.
Lesson 3 Follow a System
Smart investors follow a system to take the emotion out of their decisions and ensure they don’t speculate.
This may be boring, but it’s profitable.
Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But many investors without a system found themselves in financial trouble when the market turned.
Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.” In other words, if you aren’t following a system that works in all market conditions you will be caught naked when the market changes.
If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring, so the rest of your life can be exciting.
Lesson 4. Get Rich Quick = Get Poor Quick
Real estate is a long term investment yet some investors chase the “fast money.”
You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.
They are often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy.
Their stories can be very compelling, even hard to resist.
They often pander to the wishes of people who would like to give up their day job to get involved in property full time, but in reality it takes most people many years to accumulate sufficient assets to do this.
Patience is an investment virtue. Warren Buffet said it right when he explained that: “Wealth is the transfer on money from the impatient to the patient.”
Lesson 5. It’s about the property
You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations.
Instead they got sidetracked by glamorous finance or tax strategies and some lost out.
Smart investors do it differently. They make educated investment decisions based on research and buy a property below it’s intrinsic value, in an area that has above average long term capital growth and then add value creating some extra capital growth.
These are just 5 of the many lessons that I learned from previous property cycles.
If you head these teachings the roller coaster ride will not be as dramatic next time round because you won’t let emotions drive your investment decisions… both fear and greed will drive you down the wrong path.
Promise yourself that as the boom rolls out you won’t get too excited, then when the next downturn hits (and you know it will) you can just confidently smile because you will have made the most of our next property boom.