121: Value base investing and actioning
The objective of this special report is to give visitors advice on value based investment and how actioning property investment opportunities and issues will lead to success – e.g. higher investment returns and capital value increases in your portfolio.
Value based investment: Most experienced investors will advise that the primary point they make money is at the point they purchase a property.
They purchase a property at the right price, right place and right time. They are looking to purchase property for at least 15% below true market value. This is something the world’s most famous investor Warren Buffet practices as a discipline. What he does is identify outstanding businesses that are well below market value – where the long term trends for that business sector positive. He tries to buy on a dip (and never on a high). He buys when everyone is pessimistic – and never when everyone is feeling optimistic. If a property investor does the same thing, they should identify a property that is below true market value in an area where economic benefits will positively impact on capital values and yields (or rental returns). The investor will buy when everyone’s feeling gloomy and never at the peak of the market.
An example of someone showing Buffet like investment discipline is an investor buying a one bedroom flat in Shoreditch-London from a motivated (or distressed) seller for 15% below true market value. You then upgrade at low cost, and get a good high rental paying tenant. You sit on this investment for the next ten year – because of the economic trends, you are pretty sure prices will rise (City and Docklands services jobs, Olympics 2 miles away, close to the new Kings Cross High Speed One rail line link). You believe interest rates have peaked and there are distressed sellers – things are likely to improve once interest rates drop again.
An example of someone not showing Buffet like investment discipline is an investor that buys a recently renovated house in small town in North England without achieving any reduction in price – the owner is in no rush to sell, and the price is full – you purchase it because you like it yourself – a well looked after house in a below average neighbourhood. You did not research the rental market – it’s poor, rents are low demand is low. The Local Authority is talking about laying off 100 local staff and the meat packaging factory down the road – the town largest employer, is rumoured to be closing next year. It’s 35 miles from the nearest city and the local economy is in decline. Interest rates are just about to shoot up since inflation has taken off.
No-one has got a “crystal ball” – but an investor can reduce their risk dramatically by purchasing at significantly below market value from motivated sellers. And if you keep abreast of economic trends, you should be able to beat the average market (e.g. the average home buyer).
Action Focus Leads to Success
You can’t make serious money in property without being action focused. It might be great fun analysing, pontificating, researching and waiting for the “right time” to buy – but its human nature to use one’s brain as an excuse for not acting, doing or making a decision. It’s frankly easier and more comfortable reading and researching. For most people, picking up the phone and calling about a property, or knocking on someone’s door on the off-chance you might buy a cheap parcel of land is far more difficult – we don’t like being rejected. It’s the fear of failure – often taught at school or by our parents that can hold us back. The single most value destroying thing is “inaction”. Not tackling issues and not hunting down opportunities. If you want to be a successful property investor – seek out opportunities and tackle issues head on. This means – you have to get out of your comfort zone. Get off you backside – onto the phone and into the car.
· Issues: It’s a good discipline to write a list of key issues at the beginning of the week – then your own individual action plan to tackle the key issues. Then put a red box next to the action item. You then review the list every week - the target is to turn all the red boxes, through amber to green (issue now solved).
· Opportunities: It’s also a good discipline to write a list of key opportunities at the beginning of the week – then your own individual action plan to seize on these opportunities, also using the traffic light system. If you tackle issues and seize on opportunities in the property investment world, you will almost certainly be very successful. It wont matter too much what the market is doing, what the trends are suggesting – these will help, but you’ll make your money from investing in below market value property, with high yields – if you also review the trends and timing, you’ll also have a portfolio with above average capital value growth prospects.
Never underestimate yourself: So often one hears people saying “I’m not clever enough to do that” or “I’m not good enough to do this”. Most people only use 20% of their mental capability – most people don’t even realize how intelligent they actually are. In fact, how many times in a week do you genuinely come across someone that you think is not intelligent? It’s very rare indeed. It’s just a case of channeling your unique intelligence into being a good property investor – this requires:
· Focus: on finding good deals then transacting and managing the property well (or having a good managing agent to do this for you)
· Financial education and discipline: making sure your cashflow is healthy, you have cash reserves in hand, take advantage of the best financing opportunity (lowest rates, best terms) and release equity for further investment at the correct time and rates. If you struggle with finance, it’s very important you find a good finance adviser who you trust - and try and learn as much in the short time you have to allow you to make competent investment decisions.
· Action: again, seeking out good opportunities, acting on them and tackling key issues.
We hope this special report has helped to clearly describe how purchase of below market value property in a growing area along with being action focused can lead to large financial benefits.