One of the disadvantages of being relatively new to the investing scene is that I haven’t lived through several property cycles so I am not able to take that historical experience and overlay it on to today’s situation. However, I do try to pick the brains of the older hands and I find a very common theme.
They virtually all think a slump has been coming for some time (world wide slump). Many expected it 3 years ago. They virtually all think we will see significant drops in value and a return to double digit yields. None of them can intelligently explain why their historically based predictions have not happened yet. :)
I think it is important that it is this historical/fresh contrast that causes so much of the conflicting information we see in the media. Our opinions will always be coloured by our experiences.
A former employer of mine in the property industry cashed up completely in early 2005 and was waiting for the slump that was about to arrive to get back into the market. Nearly 3 years later their money has been languishing in managed funds making them zip after tax. But it was a 50-50 call given the property cycle history. If they’d been right, they might have made some good coin.
In the paper this weekend a leading economist is saying that based on his knowledge and research that it is nonsense to assume that property prices will double in the next ten years. In the same article an opponent states that based on his knowledge and research only a fool would predict that they wouldn’t double. Who is right??
Well I am certainly not going to try and second guess the experts. I believe that as investors we have to do 2 things.
1. Look at the obvious data and make intelligent decisions.
2. Ensure we have rules that will keep us as safe as possible regardless of what may occur.
Take care
Josh
Wednesday, October 31, 2007
Thursday, October 25, 2007
Property Trading Part 2 - Trading in a Slump
Talk to anyone who has been in the game a long time and they all agree that a slump offers the greatest opportunities but only to those who really know what they are doing. This is not a time to be buying skinny deals and hoping that someone will magically appear and pay us a fortune for it. That doesn’t mean we shouldn’t be trading, but that we need to be a bit more sophisticated about what we are doing to stay safe.
So the rules for trading revolve around two things:
1. Margin
You MUST know your numbers on any trade. If you not certain that your minimum margin is covered then don’t buy anything. Your risk of having to settle on a trade in this type of market is higher, so you have to be absolutely certain a deal is a deal to cover yourself if you have to settle on it.
2. Strategies
The second thing is to be very clear on what strategies you are going to employ in this market. Some strategies work well in a slump, some are high risk.
Safe Slump Strategies
Buying to Order:
There are always people buying property in any market, dealing with pre-approved buyers is great in a slump.
Large Margin Straight Trades:
A deal that has huge margin in it and requires no work on your part, in other words buy it and contemporaneously sell it, works well in any market. In a slump ensure the margins are fat, and go for long term due diligence and long term settlement so you have time to secure buyers.
Sandwich Lease Options:
Slumps are a fabulous time to relieve tired landlords of their rentals by guaranteeing their rent with an option to purchase and then leasing them down to buyers.
So the rules for trading revolve around two things:
1. Margin
You MUST know your numbers on any trade. If you not certain that your minimum margin is covered then don’t buy anything. Your risk of having to settle on a trade in this type of market is higher, so you have to be absolutely certain a deal is a deal to cover yourself if you have to settle on it.
2. Strategies
The second thing is to be very clear on what strategies you are going to employ in this market. Some strategies work well in a slump, some are high risk.
Safe Slump Strategies
Buying to Order:
There are always people buying property in any market, dealing with pre-approved buyers is great in a slump.
Large Margin Straight Trades:
A deal that has huge margin in it and requires no work on your part, in other words buy it and contemporaneously sell it, works well in any market. In a slump ensure the margins are fat, and go for long term due diligence and long term settlement so you have time to secure buyers.
Sandwich Lease Options:
Slumps are a fabulous time to relieve tired landlords of their rentals by guaranteeing their rent with an option to purchase and then leasing them down to buyers.
Transactional Engineering 101
As an educated investor you should have better negotiation skills than an average home buyer. So a really simple way to create income for you is to assist people buying their own home. There are two "obvious" ways to do this.
1. If someone already has a property under contract and they are still conditional, you could offer to negotiate the purchase further and share any savings between the two of you. Your function is to explore any opportunities to negotiate the price down.
Given that this was an emotional buyer probably it may well be that they have simply paid too much so a Valuation of the property would be a good place to start. If I can negotiate the deal by a further ten thousand dollars which would be a walk in the park 90% of the time, you've just made 5 thousand dollars!
2. When someone is looking to buy a home get them to go and find the house they want but they must not enter into negotiations to purchase. They simply come to you with what they are happy to pay for it. I am working on several of these at the moment and there is no risk. Find what someone wants and give it to them.
Almost all of you would know someone who is looking to purchase a property, offer to help them find it. You can contemporaneously settle or assign.
1. If someone already has a property under contract and they are still conditional, you could offer to negotiate the purchase further and share any savings between the two of you. Your function is to explore any opportunities to negotiate the price down.
Given that this was an emotional buyer probably it may well be that they have simply paid too much so a Valuation of the property would be a good place to start. If I can negotiate the deal by a further ten thousand dollars which would be a walk in the park 90% of the time, you've just made 5 thousand dollars!
2. When someone is looking to buy a home get them to go and find the house they want but they must not enter into negotiations to purchase. They simply come to you with what they are happy to pay for it. I am working on several of these at the moment and there is no risk. Find what someone wants and give it to them.
Almost all of you would know someone who is looking to purchase a property, offer to help them find it. You can contemporaneously settle or assign.
Property Trading Part 1
The simple fact is that people are always buying and selling homes. So rather than just looking for good deals and trying to find a buyer, start with the buyer. Understand that this is slightly different to a traditional property finder’s role. You will normally be dealing with an end buyer rather than an investor.
There is always an industry or market segment that is doing better than most others. By targeting that market segment for buyers you can significantly increase your success. I have a client who is looking for new properties to buy to reduce his tax bill because his profits from his business is so high. A good propblem to have I think!
So look for the industries where people do have money and find a way to target them for investment property. I heard recently of someone who targeted pilots and he basically set up a network to help them invest in property.
Moral of the story? Be creative!!
There is always an industry or market segment that is doing better than most others. By targeting that market segment for buyers you can significantly increase your success. I have a client who is looking for new properties to buy to reduce his tax bill because his profits from his business is so high. A good propblem to have I think!
So look for the industries where people do have money and find a way to target them for investment property. I heard recently of someone who targeted pilots and he basically set up a network to help them invest in property.
Moral of the story? Be creative!!