The 2 biggest lessons in real estate investment

These are the facets that will help you “remember to breathe” (more about that later).

Lesson 1: Get rich slow

Talk to a group of buyers who were fortunate enough to acquire a good-quality holding in Sydney between 2009 and 2012.

Now, a percentage of those are experienced souls who have been at this game for a while. They’ve seen the ups, downs and sidewards of the market and realise quick bursts of capital growth can be followed by extended periods of flat performance.

Unfortunately, among the surveyed crowd, there will also be plenty of others for whom this period of growth was their first. They’ll be applauding their “clever strategic approach” and congratulating themselves on having superior research skills.

These are usually first- or second-time landlords who got in at the right moment and have seen their property’s value rise by 50 per cent to 70 per cent in a short period. This crew is unfortunate because their psyche is now ingrained with the opinion that making money in real estate is both easy and fast.

Recent value gains in our biggest capital city have been extraordinary and profitable, but don’t for one minute believe they are the norm. Annual growth in the double digits is a brilliant thing if you buy early, but serious wealth comes from long-term investing.

The dangers are real. I’ve heard of a number of investors without guidance who adopt the mantra “buy, refinance, buy, refinance, buy, refinance…” with scant regards to their financial resilience, the market they’re in and the cycle stage it occupies.

Markets turn (as you’ve no doubt noticed) and those who overextend their finance to keep riding this one-way ladder will find that once they run out of rungs, there is only a single way down — and it’s hard and fast.

In my experience, you must hold a property for an absolute minimum of 10 years before you start to see established value growth… and this is a minimum.

Take a look at Brisbane. It’s a market with exceptionally good fundamentals including affordability and lifestyle, plus economic and population growth.

Since 2008, Brisbane property has put in one of its least impressive decade-long performances in memory. During that time, there will have been those who speculated on a purchase only to sell within five years because the gains weren’t as good as Sydney or Melbourne.

What an error to make.

Despite the perceived lukewarm market over those 10 years, Brisbane has seen median price growth of almost 40 per cent. While that may not sound extraordinary, it was during a time when a major flood event occurred and the fallout of the post mining boom hit property prices.

So, despite the troubles, Brisbane investors who’ve waited are still well ahead… and best of all, the fundamentals look extraordinarily good for the next few years.

Lesson 2: Compound wealth

This is, without doubt, one of the single greatest financial lessons new investors can add to the quiver of learnings. Compound growth builds phenomenal financial outcomes.

There are two elements to remember here.

Firstly, by holding a property over the long term, you are effectively reinvesting the equity to build more value. Let’s use a simple, super-conservative example.

If you buy a property today for $500,000 in an area growing by a very modest average of 5 per cent a year, that doesn’t mean you will make $25,000 per year over the next 10 years. Compound growth recognises that you will be “reinvesting” that $25,000 from the first year, so you will now be holding an asset worth $525,000 that will grow another 5 per cent in year two.

You now own an asset worth $551,240 that will grow again by 5 per cent.

See where we’re going here? I’ve done the decade-long numbers for you. If you were just making a 5 per cent non-compounded gain of $25,000 a year on your $500,000 investment, at the end of 10 years your holding is worth $750,000.

But if you allow for the “reinvestment” value of compounding, those same figures will see that asset be worth $814,447. That’s a compounding bonus of almost $65,000 in an underperforming market for doing very little.

The second element of compound growth is even better, because you add to that the boost of holding multiple properties AND being more strategic in your purchases.

If you owned a portfolio valued at $3 million, and its compounding under the same modest rules above, in 10 years it will be worth $4,886,684 — an almost $1.9 million gain. That’s a pretty handy chunk of change.

Now imagine you are holding these properties through two or three of these cycles. The potential for upside is mind-blowing.

For well-informed and highly diversified investors, there is also the chance to buy at the right stage in the cycle by not limiting yourself to one location but looking nationwide.

I realise there are variables and nuances in real life that need to be tackled, but for this exercise, it’s important to be aware of why long-term strategic investment yields extraordinary results.

Why these lessons are crucial

Armed with this knowledge, a savvy investor knows how to take a long-term view of their portfolio, especially when things look dire. As I like to say… Remember to breathe!

When you hit a bump in the road, stop, gather your thoughts and concentrate on the long game strategy. You are not in this for the short haul, but rather to reap the rewards in decades to come.

Markets rise slowly, growth compounds and, in the end if you stay the course, you will be looking back on your decision to remain in the game as one of the wisest moves of your life. Just remember to breathe.

Happy hunting!