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Property Investment Strategies In The New World

Those of you who follow property stories in the media would have noticed an 'upturn' in popular market commentary. In itself this is an interesting development as some surveys have shown a significant portion of the population makes investment decisions based on reporting in the popular media. The flip side of this is the media reports yesterday's news - it doesn't make tomorrows news. In other words the papers are telling us what has happened rather than telling us, with any degree of authority, what will happen.

Bearing all of this in mind this week Residex released their regular newsletter showing house prices started stabilising 12 months ago. Sure price improvements haven't reached 'headline level' but they have to start somewhere. The widely expected reduction in interest rates, if they happen, at today's RBA meeting may well be the catalyst for further improvements in property prices.

While the national property market has been slow waking from its slumber the same cannot be said for the Perth market where the upswing has been more recent and pronounced.

John Edwards, (Residex CEO) has gone on record to say Perth is "clearly out of the correction phase." The same report also identifies the recent surge in Perth rents as being a clear indication of the status of the Perth market and it becoming more attractive again to investors.

Notwithstanding my previous comments it seems a number of property investors continue to adopt a ''buy and hope" strategy.

Typically these investors will buy a property for cashflow or growth without knowing the long term implications of their investment decision. It is fair to say that both strategies have had their degrees of success during the last property cycle. But the last property cycle was something 'out of the box' and may not be repeated in our lifetime as it was largely fueled by ready access to money, significant media exposure, unprecedented population increases, significant investment in the mining industry, a booming economy, low unemployment rates, prolonged low interest rates and the release of a number of big selling 'secrets to property investment success' how to do it books. Throw all of these factors into a mixing bowl and all investors, irrespective of their strategy, should have enjoyed some level of success over the last 10 years.

You may well be wondering if I am suggesting not to invest in property. Far from it. What I am saying is 'think more carefully about how you in invest in property.' In more recent years the market has changed and property investors need to develop a different approach to their investments if they are to enjoy continued success. It is clear different property investment strategies in the new world are required.

On this very note I received another one of 'those emails' in my inbox this week from Bill Zheng . The email, in part, discussed this very subject and went onto state, "you can’t get ahead by simply buying better cash flow properties with lower growth rates" and further, "you can’t get ahead by simply buying higher growth properties with severe negative cash flow either."

In summary Bill Zheng identified the key to success as buying investment properties that grow at a rate above the long term growth rate of 8.6% AND which have positive cashflow AT THE SAME TIME. One without the other is much like trying to make a cake with half the ingredients. It simply won't work. This point of view is consistent with Eos principles and was the catalyst behind us setting up our Armchair Developer concept.

Speaking of 'buy and hope.'

Last week I was fortunate to be in a Webinar audience discussing a subject very close to my heart - "Property Holding Costs." It is fair to say a large portion of the audience had a capital growth strategy and were utilising a negative gearing strategy as the core focus in their investing. Interestingly the tone of the webinar suggested many investors had little understanding of the long term implications of some of their investment decisions and didn't fully comprehend how their strategy and/or investment decisions played out on other aspects of their livelihood.

On this very same point the ATO's Taxation Statistics 2009-10 revealed that of the 1,75m property investors approximately 63% of them were negatively geared. (avg $176/week). More interesting is the relatively large numbers of property investors (75%) who were on what is widely considered low/middle income earners. On top of this approximately 75% of all investment properties by value were held by people in the over 45yrs age group. Clearly these figures are a mismatch - negative gearing, as a strategy, is more suited to higher income earners who have time on their side.

At Eos our focus has always been to provide a wholistic, balanced, long term perspective on property investing. The recommended strategy must match the needs of the individual. It is this part of our operations which, when combined with our Armchair Developer program, should provide many success stories for our investors, even in challenging times.