The Great Property Hoax : How most people fail miserably when investing in properties

Lei Feng | September 13, 2016

Yesterday, I had a meeting with my friend Joe who wanted to get into the property market and started his investment journey. As normal, the meeting went pretty well and we had a lot of cool chats about how he could save himself enormous amount of frustration by avoiding the common traps which were normally made by budding investors when they firstly got started.

I’ve been doing property consulting for my private clients for almost a decade now. From thousands of conversations I had with my clients, what always amused me was that people always thought the key to success in property was to have the perfect strategy, the perfect investment and perfect growth. However, quite often, I found that most people still failed miserably in the game of property even if they’ve done everything they were told to do.

This is what I called “Statistic Trap”.

“Less than 1% of Australian own more than 4 properties…”.

The number 1 reason why 99% people failed at investing in property is not because they didn’t have the cutting-edge strategies and tactics, not about lack of experience and certainly not about lack of money.

It is because most people failed to ask themselves the question of WHY?

For example, here’s the typical conversation I normally had with every single client:

Joe: “Which type of property should I buy?”

Me: “It’s not the issue of which property you will buy, it’s the issue of why you want to buy properties?”

Joe: “I want to invest.”

Me: “Why do you want to invest, and why now?”

Joe: “Because the cash sitting in the bank is doing nothing now. I want to invest in property and make some money.”

Me: “Ok. What will you do if the property you bought has increased its value?”

Joe: “I will either sell the property or I will refinance and pull the money out and buy another one.”

Me: “If the second one goes up in value as well, what will you do next?”

Joe: “I will buy another one.”

Me: “So, are you investing in properties for the sake of investing in them?”

Joe: “Umm…”

Me: “Something to ponder…”

See, most of us tend to be caught up so much into the details of investment. We are always looking for good, better and superior ways of making money. But we rarely slow down and think about what we are going to do if we eventually made the money. And more importantly, we often failed to define how much money is enough for us.

It’s like running a marathon but without knowing where is the final destination. It’s a never-ending marathon. You can keep running until you are fully exhausted.

Investing in properties without a clearly defined goal is no different than running a marathon without knowing the final destination. It’s a game that is designed to make you fail.

For example, 10 years ago I defined that the reason why I want to invest in properties is because I want to create a perfect lifestyle for my family so that I can follow my passion and live my life to the fullest without worrying about financial stress and work.

In order to quantity my goal, I worked out pretty quickly that if my property portfolio can generate just $5,000 per month in rents, it will replace all my personal necessity needs. (Cost for living, eating etc.) Then this will give me the ability to reclaim my life back and spend time on something that truly inspires me. I called $5,000 per month is my financial security number.

However, in order to fully support my ideal lifestyle, I need to generate $50,000 per month from my portfolio so that it can service all my additional lifestyle needs (Luxury houses, cars, holidays etc.). I call it my financial freedom number.

First of all, in order to achieve $5,000 monthly income, all I needed was to have 3 properties (valued at $500,000 each) debt free…

The strategy for me of having 3 debt free properties was pretty simple. I needed to purchase 1 property every 2 years over the course of 12 years. And due to the fact of  real estate doubling value every 10 years, I would sell down the oldest 3 properties and pay down the debt for the newest 3. The 3 properties left in my portfolio will be debt free unencumbered.

On the other hand, in order to achieve $50,000 monthly income, I needed to accumulate 30 properties with no debt instead 3.  Now you can probably imagine that the strategy of achieving 30 properties compared with 3 is dramatically different. Instead of relying on the market growth, I needed to add an element of acceleration. In another word, I needed to become an active investor rather an passive investor.

Therefore, I started doing simple splitters where I subdivided a lot into two and sold one lot & kept another. I also did quite a lot of renovation to bump up the equity base. Following from those, I did small land subdivision, strata units subdivision etc.

And eventually, I entered into the world of property development. Today, property development becomes my primary strategy for reaching my next personal financial goal.

The point I want to make is that people always put strategies first no matter where you go. Needless to say, a strategy without an outcome is worthless.

I often confused people when I said to them that whether you’ve made the money from the 1st property you bought will make no difference to your life. People are always looking for the perfect investment that set them free. But the perfect investment never exists.

There never be that one property which will set you free. What you really need are a collective of properties which once reached a critical mass can generate enough passive income for you to support your ideal lifestyle.

In order to do that, you need a plan which allows you to be able to consistently acquire assets when you get started and allows you to be able to consistently sell down assets to consolidate your asset base once your portfolio reaches a critical mass.

Alternatively, if your goal is to achieve 20 properties debt free in a decade, it become obvious that it’s almost impossible to purely rely on market uplift. You actually need to become more proactive in your approach such as executing more splitters, subdivisions and renovation etc. Who knows, you might end up becoming a developer.

“Set your goal first, and quantify your goal and then develop a strategy to get you there. You might be surprised the steps of getting from where you are right now to where you want to be (financial security) is a lot simpler than you might have thought.

On the other hand, if you have a bigger financial goal, you might discover that what traditionally worked for your friends and family members might not work for you. You might need to be more proactive in your approach, expand your knowledge and undertake more learnings rather than just buying properties and relying on the market growth. You need to manufacture your own growth in order to accelerate the process and achieve the dream of being financially free.”

I do hope that you are getting some value from this post and understand that there is no strategy or asset class better than the other. It’s all relative and specific to the personal circumstances.

Once you understand the ultimate goal, the strategy will become much more obvious to you. You might soon realise that things used to work for Joe might not work for you and vice versa. The tragedy I’ve seen over and over gain is that many people take it for granted that whatever worked for other people would work for me as well and they failed miserably. Because everyone’s definition of success is unique and different.

If you enjoy the content and would like my help to tailor a strategy that will reach your personal investment goals, I’m happy to chat with you and help you to come up a plan that will put you onto the right path towards your future financial security/freedom.

There’s no charge for the conversation and there’s no catch. If you enjoy the conversation, we might decide to become my long term client. On the other hand, if you think I’ve wasted a single minute of your time, I’ll personally write a check of $1,500 as a compensation for your time. Either way, you come out ahead. 

 

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