Billionaire and master investor Warren Buffet once famously said:
You only find out who is swimming naked when the tide goes out.
How true this is in real estate investment. People who weren’t following a system that works in all market conditions found themselves get burned — or caught swimming naked — when the market changes.
And change it will.
Real estate markets operate in cycles. Booms are followed by busts, which revert to booms when the time is right. People’s attitudes are also largely influenced by this: They get too carried away when the market is booming and too disheartened during slumps. This shouldn’t be the case, according to seasoned Australian real estate investor Michael Yardney, who said letting your emotions drive your investment strategies is a sure-fire way to disaster.
There are, however, lessons every would-be real estate investor should bear in mind. Here are 5 of them.
1. Booms Don’t Last Forever
Remember the dot.com bubble in the late 1990s? It was an exciting time for many investors, who obviously thought and wrongly assumed that booms are infinite. Time has proven them wrong, of course. The likes of Pets.com and Boo.com went bankrupt, while Google and Amazon lost a large portion of their market capitalization, which took them years to recover.
What lesson can real estate investors learn from this then? According to Yardney, real estate markets behave cyclically with each boom sets us up for the next bust. While the news regarding real estate is positive today, we know that over the next few years the buoyant market conditions will be followed by a property bust. The important thing is not to get sidetracked by the prospect of a downturn, but rather to prepare for it while you take advantage of its bounty.
2. Doomsayers Won’t Get You Anywhere
As long as there will be people keen on investing, there will be those who’ll advise them otherwise; those who act like seers who foresee property prices to stop rising, or, worse, to even plummet. However, as I have mentioned above, downturns one way or another are bound to happen, so it’s futile worrying about them. A better strategy is to study the market very carefully and strategize your investment decisions so that you’re cushioned when the next one comes.
Fear is a powerful emotion, and people who got burned in real estate investment make for interesting news headline, then others miss out the opportunity to develop their own financial independence because of this fear.
3. Follow a System That Works
Devising a smart system may be boring, but it ensures that your emotion doesn’t get in the way of your investment decisions. According to Yardney, almost anyone make money during booms because the market covers up most of their mistakes. However, it is during busts that those who don’t follow an effective system get exposed—and burned.
4. Be Wary of Get-Rich-Quick Schemes
You probably know by now that real estate is a long-term investment. It definitely isn’t for the get-rich-quick lot, an attitude that may even potentially lead you to financial trouble. I’m sure you’ve encountered people like that—they look for deals that will make them fabulously rich, but then if you see them a year later they’re no better off financially.
Lesson? Patience is an investment virtue. After all, according to Buffett, wealth is the transfer of money from the impatient to the patient.
5. And It’s About the Property
Since your business is real estate, make sure that your product (i.e., properties) is the best you could afford in proven locations. Don’t get sidetracked by attractive financing options or tax strategies. Instead, make educated investment decisions based on research and buy a property that’s got a huge potential, in an area with a large working population, impeccable infrastructure, and promises—based on historical data, of course—above-average long-term capital growth.
If you heed these lessons your real estate investment need not be a dramatic roller coaster ride. Don’t let your emotions dictate your decisions and cloud your judgment, but don’t let the naysayers scare the wits out of you either.
