On any given day you can read forecasts from prestigious economists about what direction the property market is going in, and you’ve probably also noticed that the forecasts can vary day-by-day and economist-to-economist!
Even so, you’ve probably still been unsettled by that acquaintance at dinner who is always so confident about his or her investments and always seems to have ingenious schemes that make you wonder whether you are missing out. You might find yourself thinking, “I’ve never heard of this company, but if they guarantee a 5% return, well, that does seem rather good…” or “Well, Bob does know a lot about the market, and he says Ugandan property is set for a boom that could double prices!”
If you find yourself considering fool-proof, risk-free, high-return investment schemes, please count to 10, sit down, and arrange a meeting with an independent financial advisor. Failing to do so can permanently damage your financial health.
Forecasts are wrong almost as often as they are right.
It’s not that forecasters are wrong because they are pulling numbers out of hats (at least the more professional ones don’t), but they tend to forecast the future based on how the world looked in the past. So they might say “As compared to rents, prices are at their lowest level in 20 years”. Sure, that might mean that prices are set to rise. But then again, rents could fall, or prices could fall even further to their lowest level in 50 years, or maybe something important in the economy has changed altogether and prices will never recover (remember when property in Tokyo was said to be worth more than all of California?).
It’s not surprising that forecasts are often wrong.
Creative types are working hard to make the past look different from the future. For instance, AirBnB is lowering prices for short-term real estate rentals all over the world, policymakers in the UK are trying to knock down the barriers that have historically made housing so expensive there and techies have transformed what were once easy-going Californian suburbs into some of the most sought-after real-estate in the world.
Professionals can use forecasts by making calculated bets across a diversified portfolio of investments.
They get things right a little over half the time, and because their bets are spread out, they aren’t too badly burned by the plays that go very wrong. Net-net, they achieve returns that are a little above what they might have otherwise, and that pays for all that effort and risk and all the smart analysts and researchers they hire.
However, as an individual, it is unlikely that you have the time and resources to build such a diversified portfolio of holdings and maintain a team of top-tier specialists. So wagering a significant portion of your assets on someone’s hunch that a certain high-risk market or development looks good is foolish.
In fact, research has shown that most of your personal investment returns are likely to be explained by the broad asset classes you invest in (e.g. real estate vs. savings accounts) and what fees and expenses you incur, rather than by specific trades. So forget the get-rich-quick schemes and focus on these common-sense tips for successful property market investment.
Property market investment tips
Analyse property like an investment, not a holiday home.
Sure, that cottage with a thatched roof is beautiful, as is that beachfront bungalow in Thailand. But what matters to you as an investor are factors like: the price of the property, the rent it can command, the likelihood it will increase in value, the likelihood it might stay vacant, how much maintenance it will require, and whether taxes, expenses and mortgage rates are attractive. At the right price, a cramped flat in a grim but well-located neighbourhood in a northern UK city might well be more attractive than a luxury penthouse in London.
Use your common-sense to judge the market and the property.
Does the town have a strong and diversified economy with lots of company headquarters, universities, government offices, and so on? Or is it a declining town with no jobs, and the young are moving away? Is the property close to the right transport links? Does it fit the neighbourhood and the town, or are you looking at a large and beautiful house in a second-rate area? Is it really worth 20 years of a doctor’s wages? Or does your gut tell you that’s not reasonable?
If you are only investing in a single property, be conservative.
If you have several investment properties, it makes sense to be bold and bet on riskier opportunities. But if you are investing a significant portion of your assets into a single piece of real-estate, don’t shoot for the moon. Go for reasonably priced, convenient property in safe markets that would be attractive to many different types of tenant.
Shop around and fight hard for the right price, mortgage and expenses.
That extra 5% on the price, 0.1% on the mortgage rate, or extra 1% on the management fee will impact your returns for years to come, and once you accept them, there is no turning back. Think about how hard it was to earn that money and even if you don’t enjoy it, bargain hard in order to lock in the best returns.
In summary, betting on market forecasts or get-rich-quick schemes can be tempting but is very risky. If you are looking to invest in property, it’s best to keep cool and focus on making a plain-vanilla investment in reasonably-priced, income-generating property. Go for real estate that can provide you with good surprises rather than bad ones, and you won’t regret it!