Cycles and why they exist
There are plenty of different economic theories as to why different things happen at different parts of the market cycle. As investors it is about understanding where markets are, at different times of the cycle.
For example just because Sydney had great growth between 2011 and 2017, it didn’t mean that the Brisbane market was achieving growth as well. It is important to understand that just because one market has slowed this is not the same Australia wide and there is usually another market just about to enter the growth phase of the cycle.
Sometimes in fact the best thing to do in a particular market is nothing at all. When you identify where each different market is in the cycle you will point out particular markets that need more time to mature through the cycle before action is necessary.
A great resource I use is the Herron Todd White Month In Review Report. This is a free resource you can get from their website which helps you identify where each Australian Market is, in its stage in the cycle. A great place to start is to look at their property clock which is a great visual overview of the cycle and Australian Property Market.
The power of timing
In the global property industry and the Australian property market, timing is not discussed enough and timing is key.
There are times in the market where the property market sits flat. There are also times when property prices drop. Then there is the time in the market when all investors want to be in; when property prices are steadily rising or even rise extremely quickly over a shorter period of time.
The more you can learn about timing the more effective you will be at riding the wave of property growth.
A recent example of the growth cycle and timing the market is if you were to have purchased property in either the Sydney or Melbourne markets in 2011. From 2011 to 2017 you would have seen exceptional growth in the value of your property as prices steadily rose in the growth phase of the cycle.
If you are eager to learn more about cycles Phillip Anderson has written a great book called The Secret Life Of Real Estate and Banking which looks at timing of the Global property cycle in America over the last 250 years. To give you an insight into Australia, we have followed the American market by about 1 year for the last 200 years.
The Power In The Land is another interesting book written by Fred Harrison and this looks at the – European and UK market for the last 300 years. Both of these books look at the larger 18 year global property cycle.
Where smart investors are putting their money
One thing I have learnt from talking to so many different investors across different industries is that a smart investor won’t have their money do nothing. Investing is about wealth creation and the best way to achieve this is by having consistent long term results.
Whether it be business, shares or property I find most smart investors will put their money into one product until they get a return and then move it into another market or different product until they get their return.
An example of where I see this in the property industry is moving between markets at different stages of the cycle, consistently aiming to buy at the bottom and sell at the top. For example, an investor who bought in Sydney in 2011 has seen an average of 7% growth p.a. over the last 6 years. They will look at existing this market now that it has seen such significant growth and search for a market like Brisbane which has sat flat for the last 6 years achieving about 1.5% growth p.a. Their strategy is to consistently ride the growth cycle up.
Some people prefer to avoid the exit and entry costs of real estate and go for a long term buy and hold strategy. I personally like this strategy and use a portion of all my investment money to do both.
Make your money work for you
If you understand the power of Compound growth you’ll understand that the better the growth rate in the short term the better the long term wealth and cash flow position. It can be dangerous to have your money sitting their and not working for you. You may not notice this in the short term but in the long term the affects of not taking action can mean you end up living on the pension.
I have seen both my grandparents live on the pension. They saved their entire lives but didn’t actually have enough to survive in the future. One of my grandma’s owned her own home so it was a little easier but for the other it was really tight when it came time to retire and settle down and it was heartbreaking to watch.
It’s not okay for your money to be sitting in the bank getting a 1% return, particularity on a large scale. Ideally you can set some of your capital aside for a rainy day or a rainy month and set a certain percentage aside to be re-invested into the market. Over time that money compounds and creates wealth.
Let’s look at the effects of compounding and difference between getting a 4% return and 6% return as an example.
Say you are purchasing an investment property for $400,000. The plan is to hold it for the next 15 years and you are hoping to own it outright by then and be supported by the passive income. You have two markets to choose from:
Investment A provides you with an average of 4% p.a. for the next 15 years and;
Investment B provides you with an average of 6% p.a. for the next 15 years.
The difference is over $235,000 in your pocket in either capital growth or available equity.
Say you have $100,000,000 in the market over a 15 year period of time, perhaps your own home and one investment property.
The difference in selecting a market that returns 4% p.a. and 6% p.a. over that period is over $550,000.
That is the effect of compounding and the importance of selecting the right market at the right time.
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Riding the property growth cycle
Riding the property growth cycle is about understanding the cycle, timing, the effects of compounding and where smart people who are already financially independent are investing their money.
When it comes to purchasing property it is important not to get caught up in the potential immediate costs or gains of the property. So many people get obsessed with making $20,000 on the way in or making money in the short term. If you are purchasing the wrong product in the wrong market at the wrong time the lost compounded growth can be damaging.
This is why I don’t focus on cheaper properties in regional areas or properties located on main roads, backing onto schools, churches or industrial as all of these little things stack up to the ultimate value of your home.
It is possible to go out there and get a much better result than the average you’ve just got to be smart, do your research and remain focussed.
To book a complimentary strategy session with the team at Pumped on Property click here. We would love to spend some time learning about where you are right now and where you’re looking to go in the future.