Property investment professionals make wise investment decisions
Tuesday, 08 November 2011, 08:57
PROPERTY NEWS - Investor risk - the risk of an investor making poor or emotional investment decisions - ranks high among the biggest risks property investors face. Some wise words from the world's most successful investor, Warren Buffet, point the way for property investors to mitigate this risk.
"Investor risk" is a term that refers to the fact that investors are often their own worst enemies, making poor or emotional investment decisions, swaying from thoroughly planned long-term investment strategies based on short-term events, buying when prices are high and selling when prices have collapsed.
Warren Buffet, undoubtedly the most successful investor of our times, offers three pertinent pointers to help investors mitigate this risk, and local property investment expert, Dr Koos du Toit, CEO of P3 Investment Group, provides practical tips to help property investors implement Buffet's advice.
1. Know what you are doing
Buffet says: "Risk comes from not knowing what you're doing". Professional property investors make sure they thoroughly understand the game and the risks involved, and for this reason, many are members of a professional property investment organisation.
"To ensure they avoid unnecessary mistakes and pitfalls, professional property investors follow a tried-and-tested system that mitigates risk and fast-tracks success," comments Dr du Toit. "For this reason, they often belong to a professional property investment organisation that can provide them with the knowledge and skills they need; with access to relevant tools, products and services; and with insights into the latest developments and approaches in this market segment. Knowing what you are doing not only helps you to avoid mistakes, it also assists you to identify the real opportunities and gives you the confidence to take advantage of these opportunities."
2. Take a professional - and unemotional - approach
Buffet believes: "Success in investing doesn't correlate with I.Q. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
Professional property investors don't buy properties because everyone else is doing it, nor do they stop looking for opportunities when the market is depressed. "Professional property investors know that good deals exist in any market and are not swayed by the prevailing market sentiment. They apply the same fundamental investment principles regardless of the current market conditions," explains Dr du Toit. "To do so consistently, they follow a proven system underpinned by tailor-made software that allows them to apply the same stringent selection criteria to every property. This not only ensures that they select only the real opportunities, but also enables them to select the best option when faced with a number of opportunities."
While this may seem to be a time-consuming exercise, professional property investors use a range of tools at their disposal to streamline this selection process. "Professional property investors who are members of professional property investment organisations have access to pre-screened and pre-selected investment opportunities that allows them to cherry pick from only the best deals available. They then use purpose-designed software, which allows them to input the basic variables unique to each property (the price, the monthly rental income, the management costs and the rates and taxes, or levies) quickly and easily, and have instant access to four crucial indicators: the rental factor; the cash flow position at the outset; the breakeven date and total investment amount; as well as the return on investment (ROI) and internal rate of return (IIR)," says Dr du Toit. "In this way, professional property investors not only reduce the time associated with making good investment decisions, but also eliminate the risk of emotions influencing their decision-making."
3. Take a long-term approach
Because Buffet believes that "for investors as a whole, returns decrease as motion increases", his "favourite" holding period is "forever".
Buy-to-let property investment is not speculation, it is a long-term investment. Buying and selling property may produce short-term gains, but these pale into comparison when the long-term income-generating potential of a buy-to-let property is combined with its potential for capital growth.
"Professional property investors do not simply acquire properties, they acquire property assets with long-term income-generating potential," notes Dr du Toit. "The intention is to hold the property over the long term, â€˜milking' its ability to produce a passive monthly income that keeps pace with inflation year after year. This approach is almost immune to the property cycles, since regardless of whether property prices are rising or falling, the property produces an ongoing and passive inflation-linked income. And while capital appreciation is not the main objective, property investors with a long-term investment horizon are richly rewarded for their patience by superior capital growth over the years, as the ups and downs average out, producing a steady upward trend in property price inflation."
Property investors who take a professional approach to their investments not only heed advice from those who have proven their mettle, such as Buffet, but also put this advice into action when they make investment decisions. "Joining a professional property investment organisation is one way of ensuring that you are always making wise investment decisions, because as part of a community of like-minded professionals, it becomes much easier to maintain a professional approach and to keep emotion at bay when market conditions change, as they continuously do and always will," concludes Dr du Toit.