29 May 2004

How Property Investors’ Times Have Changed

Wouldn’t it be great to start out as an investor with a clean slate – the knowledge of how to go about it and an adequate timeframe to deliver our desired financial outcomes.

While we can constructively do something about acquiring knowledge, time is either our friend or our foe – depending on how we use it.

Desirable investment outcomes need time to deliver and yet increasingly time is the one variable we all try to short-cut.

In past decades, a typical investor-s lifespan looked like this:

We entered the property investment market as soon as we could acquire a deposit, concentrated on financial disciplines, increased our investment portfolio over time, worked through to 65, and had modest expenditure expectations in retirement.

But in recent times (the past generation or so) we have approached things differently. Whether it’s because we now spend greater time earlier on in education, whether we have greater financial flexibility and want to flex our wings traveling, or whether it’s because increasingly we remain single (without financial responsibilities) longer, the outcome is that often we don’t make our first serious investment until 30+.

Our ideal, but compromised investment lifespan, is often this:

Obviously when we compare these two different approaches, warning bells start ringing. For whatever reason we’ve allowed it to happen, our financial expectations and the time frames envisaged to achieve them put enormous pressure on us.

Most people realize that they can’t do it through saving after tax income or through non leveraged investment assets. Hence the increasing concentration on real property investment over the past decade. It is the one investment vehicle most of us trust to exercise optimum leverage, and yet with low downside risk. The real question on most property investors minds today is “how can I make best use of the property cycle to accelerate my investment outcomes – and is it too late to catch this cycle?”

Australian capital and regional cities often operate on different cycles – enjoying their growth spurts at often distinctly different time periods. This enables the investor to invest “counter cyclic” – to enjoy entering one market at its earliest growth stage, while another market approaches maturity. The key issue for many property investors in say Melbourne and Sydney is that these cities’ cycles are recognised as all but finished for the time being – and if your investment lifespan dictates that you only have say 10 – 15 years left to reach your goal we must look to other markets and do so quickly or accept that our goals are not achievable.

If we have determined that we are in the second investment time span model (35 – 55 years), there are a number of fundamental issues we must address:

There are 3 potential directions to tread:

  • To abandon our financial aspirations (not at all desirable).
  • To modify either our financial goals or the likely time frames necessary to achieve them (a more palatable and realistic objective).
  • To dedicate ourselves to the achievement of both our financial and timeframe goals (requiring commitment, discipline and persistence).

Whichever path we choose requires market and financial knowledge, the development of appropriate strategies, the implementation of appropriate safety nets and a commitment to act.

Most of us recognise that to achieve any reasonable financial goals, we need to invest – and again most of us are aware that it is the facility to borrow with reasonable safety, and the rental and taxation support that continues to make residential property such a powerful wealth creator over time.

It is time in the market that enables property to perform for us. Without being in the market, we relinquish our prospects of wealth creation.

Regardless of property’s cyclic position, our key is to identify the best and most logical potential growth markets available to us at any given time to make appropriate provisions for any potential cashflow or other downside risks and to take a position.

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