Worst Property Advice

Hi everyone!

Thanks Marisa for sharing my recent blog article on "The WORST Property Investing Advice EVER!" - it's great to see the lively discussion that the post has stimulated.

I thought I'd jump on and add my 2c worth to some of the points and questions that have been raised.


Let's start with the question of strategies like land banking...

Would you exclude the strategy of Land Banking from the 6-36 month horizon?

There are a couple of variations on the 'land banking' theme that need to be addressed here:

1.) Finding a site with rezoning/redevelopment/growth potential yourself, that you believe you can purchase at a particularly low price today relative to similar properties, and where you have a clear and confident expectation (based on facts rather than speculation) about what will happen to the value of the site within a specific timeframe. (For instance, if you have verifiable information on a committed plan to rezone the area from rural to high density residential within a defined timeframe).

The further out the anticipated timeframe is, the greater the risk that the anticipated change never eventuates, or the market changes adversely in the meantime and invalidates the original expectation/intent.


2.) The 'land banking schemes' heavily promoted by property spruikers, where a large developer has acquired an option over a large paddock (usually zoned rural) on the fringe of a city and intends to seek rezoning and ultimately development approval for a new land/housing estate in around a 7-15 year timeframe.

The 'proposed' lots in these schemes are promoted to investors on the basis of putting a $20k-$50k deposit down now, having no 'holding costs' for the next 7-15 years while the property goes up in value (because property values always go up and double every 7-10 years... don't they???) before the estate is finally rezoned, developed and ready.

These schemes raise a lot of questions, such as: What security does the investor have (none), where is their money (who knows), and what happens if the estate is never actually developed or the developer goes bust/disappears in the interim? Not to mention the fact that you really have no idea what the future value of the proposed piece of land will actually be when the time comes, or how over-supplied the are might be if other estates are developed at the same time. I've even seen land banking schemes promoted in the last couple of years where the price on the proposed lots was substantially higher than the price of equivalent existing blocks of land in the same area!

I would be extremely cautious about such schemes, as it's simply not possible to predict with any degree of certainty where the local property market will be by the time the estate is actually developed.


As you can probably tell from the blog article, I'm not a huge fan of speculating on the long term because of the additional risks this introduces, and typically wouldn't 'land bank' because of this (not to mention the opportunity cost of what else I could be doing with the money in the meantime to make it work harder for me, rather than sitting around waiting).

The only potential exception where I'd personally consider 'banking' land, would be if I found a great development site that stacked up on today's numbers, but I simply couldn't afford to develop it right away. In that instance I might consider 'banking' the land until I'd sorted out how to fund the development.

Cheers,
Simon
 
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"Here's the thing... Most market commentators, along with most investors, don't realise that with recent advances in the science of property market analysis it is possible to predict how the property market in a suburb will move in the next 6-36 months, with a high degree of accuracy! "
Would love to see a peer reviewed study to back up that claim.

There is no secrets.... I like the simplicity of this, article featured in API John Lindermine?, logical to me... its the old supply vs demand thing


The John Lindeman article referenced by Marisa is a great one. IMHO, John is at the forefront of the science of property market forecasting mentioned in my blog post.

Over the last 3 years, I've had the opportunity to work closely with John and to see the results of his research and analysis techniques, and they've been far more accurate than any other market analyst I've seen.

As Marisa rightly points out, accurately forecasting the market in a given area comes down to understanding the local 'market dynamics' - including what's happening in the area right now with property listings, sales, rents and vacancies.

For instance, are listings diminishing while the rate of sales is increasing? If so, that's a sign that prices are likely to rise as investors and home-buyers compete for increasingly scarce stock.

Are rents rising and vacancies falling? Increasing rental returns help to support prices by attracting more investors.

But if the supply of properties on the local market is growing faster than the rate of sales, you can expect price growth to stall or even go into reverse!

I'm running around the country at the moment with John Lindeman presenting at a series of free workshops where we go into more detail about this approach to accurately forecasting the market and how it works. If you're interested in the workshops you can find more details HERE.

Cheers,
Simon
 
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I'm curious now

I can't find which 'expert' on the property market actually said the below in an article :confused:

Holding a property for the long-term reduces the risk for an investor.
Even if the a property's value falls, you only lose if you sell for a loss.
If you hold a property for at least 10-years you're assured of a great profit.

I don't believe in attacking individuals, but rather attacking dangerous or ill-informed ideas, hence I deliberately have not named the source of the 'offending' article that inspired my blog post.

The 'offending article' came across my desk in an email from a major events promoter late last year, that would have gone to thousands of other people on the same mailing list. It worried me that so many people would read the article, and that many would simply accept the ideas as fact without question.

I'm sure if you hunt around enough on the web, you'll find the original article if you really want to. But I can guarantee you that the particular market commentator is not the only one who buys into and spruiks those myths.
 
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Well, between 1998 and 2002, it did actually double (from $250 to $500k), so as long as your property cost nothing to hold, cash flow neutral or positive, and you use 100% money from the bank, i do not see the trap. If you hold long enough there will be an opportunity window to sell for big profit.

Just an opinion, i am not an expert with property, but can analyse curve and data.

The median property price in Sydney did indeed double between 1998 and 2002.

However this does not in any way support the myth that property prices double every 7-10 years (clearly on the historical stats they don't), nor does it justify in my opinion the view that investing for the long term is a good idea or a low-risk strategy.

With interest rates running at between 6.5% and 8.5% over that period, it's highly unlikely that the typical median-priced Sydney house would have been neutral or positively geared, especially if it was 100% financed (and it's worth noting that 100% finance is impossible to achieve these days without leveraging against equity in another property).

There's also the issue of timing the market here... Unless our hypothetical investor was lucky enough to have picked just the right time to enter the market (I say 'lucky' because the analysis techniques to accurately predict short term price trends didn't really exist back in 1998), and similarly lucky enough to exit close to the top of the high growth period, then the investor's overall annualised gains would be eroded.

As noted in my original blog post, there's a very real opportunity cost associated with what else you could be doing with the cash/equity tied up in a property if that property is going nowhere or even going backwards in value.

Interestingly, if you look at how the median Sydney house price has moved over the last 30 years, you'll see that over 85% of the gains have been achieved in around 25% of the time, mainly in short bursts of 1-3 years.

Wouldn't it be more efficient if you could pick your entry and exit points to take advantage of the short-term booms when they occur, rather than buying randomly and sitting on the property for years and years hoping that the short-lived bursts of high growth actually do occur during the time you can afford to hold the property?

Just some food for thought.

Cheers,
Simon
 
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...worst advice I've been given is that it's easy.

I have a relative that bought off the plan near the Gold Coast based on the advice of the developers salespeople, after a seminar, used their conveyancers and used their financiers ! As one would expect, the sums they provided and that she now faces...are a bit different. :eek:
 
...worst advice I've been given is that it's easy.

I have a relative that bought off the plan near the Gold Coast based on the advice of the developers salespeople, after a seminar, used their conveyancers and used their financiers ! As one would expect, the sums they provided and that she now faces...are a bit different. :eek:
I agree. When I was younger I was told that all I would have to do is buy a house, rent it out and it would double every 10 years. I have built up a decent amount of equity but it takes a lot of work.
 
The kicker is that homeloans are not linked to inflation.

If you can get a property which is cashflow neutral based on 100% finance, even if the property price (and rent) only increases CPI then in 20-25 years you will be down to 50% LVR and signifcantly cashflow positive.

Sure it isn't super exciting, but you can still get the upside of a boom and the downside risk is low if adequately insured (what are the odds the property is worth less than what you paid for it 20 years later, quite low i believe if you have purchased in a major city).
 
The kicker is that homeloans are not linked to inflation.

If you can get a property which is cashflow neutral based on 100% finance, even if the property price (and rent) only increases CPI then in 20-25 years you will be down to 50% LVR and signifcantly cashflow positive.

Sure it isn't super exciting, but you can still get the upside of a boom and the downside risk is low if adequately insured (what are the odds the property is worth less than what you paid for it 20 years later, quite low i believe if you have purchased in a major city).

and the kicker is that the loan value is stuff all in real terms at that time.
 
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