What smart property investors are buying in 2011

You’d have to be living under a rock not to realise that our property markets will be very different in 2011, which has many investors asking, “What’s the right type of investment for this new era?”

They understand that the economy is running at two speeds, with some sectors doing much better than others. And they’re worried that interest rates will continue to rise, but that property values may fall a little in some areas and are unlikely to boom in others. Add to this the fact that inflation is likely to return due to full employment, government spending and the new carbon tax.

If, having survived the last few years of turbulent times in property, finance and the economy has taught us anything, it’s that we need to start taking a different approach to money and how we value it, procure it and use it.

So back to the original question: what’s going to be the best investment in the years ahead?

One thing is certain: there is no such thing as a perfect investment. If somebody tells you they have found “the perfect investment” be very skeptical and ask lots of question, because chances are they’re trying to sell you something you just shouldn’t buy.

The things I look for are:

• Liquidity (the ability to take your money out by either selling or borrowing against your investment).
• Easy management.
• Strong, stable rates of capital appreciation.
• Steady cashflow.
• A hedge against inflation.
• Good tax benefits.

When you look at the major categories of investments, you will recognise that not many fit the bill when it comes to all five of these criteria.

The instability of our world economic markets and the fickle nature of our local markets means that you’re going to have to invest in assets that are both powerful and stable.

By powerful, I mean that to act as a hedge against inflation they must have the ability to grow at high, wealth producing rates of growth. In other words, you’re going to have to be able to leverage or borrow against them.

By stable, I mean your investment should grow in value steadily and surely without major fluctuations in value.

Many investments are powerful and many are stable, but only a few are both. Prime residential real estate is one of the investment vehicles that has both power and stability in spades.

Now that doesn’t mean it’s perfect, because property is not as liquid as many other investments. It can take months to get cash out of your property portfolio, if you sell your properties. Or you may be able to get cash out quicker by borrowing against the increasing value of your property, but even this can take a month or so to organise.

While some might see this as an issue, I would argue that a relative lack of liquidity is one of the virtues of property as an investment vehicle.

Why?

Because the only way for an investment to achieve liquidity is to relinquish some of its stability. If it is liquid (easily sold like shares) it is more likely to have wide, more volatile fluctuations in value.

Let’s examine this concept a little more closely by looking at the stock market.

The stock market is another potentially powerful investment vehicle because you can borrow against your purchase of shares (buying on margin).

But in order to achieve the liquidity the stock market provides you give up some stability. Share prices are volatile and fluctuate up and down and then down and up again. Sure you can get your money out quickly, but you also run a bigger risk of making a loss.

What about putting money into a savings account?

This type of investment is both very liquid and pretty stable, but it won’t give you a wealth-producing rate of return.

If I had the choice (and I do), I’ll take stability (lack of big swings in price) over liquidity every time.

By the way, some types of property are more stable than others.

I like investing in capital cities where there is a big population base, which means there will always be buyers and tenants for my property (if I own the right type of property). And these large cities have a sizeable economic base, which means they are not heavily reliant on one or two industries.

This makes my investments stable.

Now don’t misunderstand me… not all properties are “stable”.

Those who invested in mining towns, many regional areas or holiday locations like the Gold Coast have suffered huge falls in the value of some of their properties.

Now here’s another way of looking at what makes a good investment.

Many financial planners recommend ‘when-to’ investments, which means you have to know when to buy and when to sell. Timing is crucial with these investments: if you buy low and sell high, you do well. If you get your timing wrong though, your money can be wiped out. Shares, commodities and futures tend to be ‘when-to’ investments.

I would rather put my money into a ‘how-to’ investment such as real estate, which increases steadily in value and doesn’t have the wild variations in price (if, and only if, you buy the right type of property), yet is still powerful enough to generate wealth producing rates of return through the benefits of leverage.

While timing is still important in ‘how-to’ investments, it’s nowhere near as important as how you buy them and how you add value.

‘How-to’ investments are rarely liquid, but produce real wealth.

Most ‘when-to’ investment vehicles (like the stock market) produce only a handful of large winners, but there tends to be millions of losers. On the other hand, real estate produces millions of wealthy people and only a handful of losers.

Having said that, if you also get the timing right with property investment, if you buy at the right time in the property cycle, it can massively accelerate your investment returns.

And with a new stage of the property cycle upon us, this stage will create a new group of property multi-millionaires. But if history repeats itself, and it surely will, many investors will get it wrong.

In fact, most property investors won’t ever develop the financial independence they deserve.

In part because you can’t just buy any property today and hope it will make a good investment – the markets are being very selective.

And you can’t just listen to anybody’s advice… you know, those who say come to my weekend seminar and you won’t ever have to go back to your job, or you’ll be able to retire by the end of the year.

However, there are great opportunities out there now for those investors who buy the right type of property counter cyclically.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.