Property investment: Lessons from the mountain face - Financial Advisory & Financial Services Blog | Deloitte Australia has been saved
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Like scaling a mountain face, property investment has many potential pitfalls and risks, even for the experienced investor. When done well however, both can provide significant reward.
While the stakes may be vastly different, in both cases, the difference between success and failure is the same. Putting in place the right training, understanding the risks knowing what you don’t know early on makes all the difference when a critical situation arises.
To help in understanding the topic further, here is the view of two experts with very different experiences:
John Zeckendorf is an avid mountaineer and also specialises in assets with unlocked value, distressed assets and hospitality investment. His passion for mountaineering has driven his goal to climb the highest peak on each for the seven continents and has one to go. He recently presented his unique risk management perspective at the Private Wealth Network’s Property Forum.
Ian Levi is a Partner at Deloitte Private with over 35 years experience overseeing compliance, business and taxation strategy, wealth advisory and family dynamics for private companies, high net worth families and individuals. He has a wealth of experience helping his clients understand the drivers for investment, assisting them to form sound decisions based on their investment objectives.
John and Ian’s rules for reducing risk and enhancing the rewards in property investment.
1. Understand what you don’t know
Every mountain John faces is different. In order to succeed, he needs to be prepared for anything.
He takes the same approach to property investment – understand what you don’t yet know (or indeed, can’t know!), and learn what you can before embarking on the journey.
Each investment class has its unique challenges, and you must develop a different skillset. Even within an asset class, there can be significant differences (eg regional vs. metropolitan hospitality).
John encourages finding out what you don’t know and making sure your skills match your environment. If they don’t, look to partner with others who have experience in that area to significantly lower the risk you will face. For example, if you don’t know how to climb an ice waterfall, go with someone who does. If you don’t know how to manage a particular asset, find someone who does.
Ian’s rule of thumb is if you can’t afford to lose the money don’t invest it. Learning is important, but it is secondary to trusting your advisor. Don’t do it alone if you are not confident in your knowledge – investments can also be made through private banks, wealth advisors and fund managers based upon a deep pool of research from those financial organisations.
2. Don’t follow the herd
To make good investment decisions, you must have clear objectives and strategy. This can help to dampen the noise of groupthink and enable you to analyse and seize opportunities that benefit you.
Speaking on this, John suggests the real rewards in investment often lie where the herd is not.
John illustrates this by drawing on his experiences in hospitality – he has seen 80 – 90 bidders on metropolitan hotels with returns of some 4%, while some regional areas are enjoying ridiculous returns, now and for the foreseeable future, that are largely ignored by the herd.
In this example, the noise of the crowd is no match for informed judgement. John suggests considering the price, terms or returns – if they don’t match your objectives, don’t pursue them.
Whatever choices you make, some will offer their opinion – and sometimes these can be helpful. John’s advice is to always listen – then consider, mitigate, and decide whether it has changed your opinion.
Ian says that you need to do a sensitivity analysis with property, be conservative in your assumptions, and always have a buffer. Plan for all circumstances and have sufficient financial resource capacity to withstand unexpected occurrences in property or the funding market.
There are many factors that impact the property market, including third parties, government, decisions led by market trends and interest rates, demand and supply and what competition are doing. Considering all these issues and having sufficient resources to ride out any hiccups will see you through.
Prepare, prepare, prepare!
On the mountain face (and after a deal is done), you can’t bring new things to the table easily. Preparations and small changes before the journey will save a lot of time, stress and regrets later.
Spend money where the returns are worth it. For instance, on the mountain, John brings a satellite phone, which is worth the investment and extra weight, while a toothbrush he might scrimp on.
Ian agrees with John’s perspective that future success is largely determined before the journey. He stresses due diligence on any investment is essential, either do it yourself (if you have the skill) or rely on someone you trust. In property nine times out of ten the profit is made when you buy, not when you sell.
Always go in for a good deal when you make a purchase. Over pay, and you will wait a long time before you make money on it.
There are different reasons for buying property. Many invest for a profit, while others invest for emotional reasons. Ian believes the herd mentality is generally more prevalent in the retail market than with sophisticated investors.
People may purchase a trophy asset for emotional reasons, for example, Ian recalls a recent transaction where the purchaser bought a property in a Sydney CBD street principally for bragging rights. For non-emotional purchases though, the best transactions are those that you’re prepared to walk away from.
Know how much you are prepared to lose
Both investors and mountaineers face risk of loss. Investors measure risk on how much money they could lose. For mountaineers, the loss can be much more severe and risks are measured on a scale of 1 to death!
Understand contextual risk. On the mountain, a climber must be ready to make a decision in a micro second. Investors are more fortunate, but need to be able to translate their risk to return ratio to an acceptable level. For John, he looks at the return on value at risk (VAR) as a relative measure. Put another way, would you prefer a 3% return by leaving money at the bank (0% VAR) or get a 5% return on the stock market with a 20% VAR over the same timeframe? This changes asset allocation strategies dramatically.
Different people have different benchmarks. For Ian, it depends on age and investment strategy. Some people are prepared to invest for an income stream, they don’t want to the issues of managing property or dealing with the issues of owning properties.
John’s final word: Find what you enjoy, don’t pursue anything you don’t have interest in be it sport, or investment.
Ian’s final word: Don’t invest what you can’t afford to lose.
Melissa manages the day to day operations of the Deloitte Private Connect client experience. She continually collaborates with the marketing team to plan, develop and execute new marketing campaigns.