Success in anything requires that you understand the fundamentals.
Warren Buffet has said that “the language of business is accounting”. So in this article we’ll take a look at property investment as a business and why understanding the ‘language’ is crucial if we want to succeed.
Firstly, most of us are aware that many, many people have become wealthy as a result of property investment and so it really isn’t that the strategy is unproven. A known fact is that most people that fail don’t understand the ‘language’ and don’t have an understanding of the fundamentals prior to investing.
My friends know that I’m an AFL tragic. What would it be like if, and this applies to any sport, there was no scoreboards at games or that you couldn’t read the scoreboard? The fact is that you would find it hard to pick the winners from the losers!
Think about boarding a plane. What would you do if you just got to the doorway and saw the captain look into the cockpit and say “what the hell are all those gauges for?” Would you take your seat? No chance.
The average Australian investor can’t read the gauges – scary!
Bloomberg states that 80% of businesses fail within 18 months to two years with the main reason being poor cash flow.
Property analyst Michael Matusik states that 75% of investors sell within five years with the main reason being poor cash flow.
As my teenage girls would say, “Wait! What?”
It’s fair to say that poor cash flow can kill a business and an investment property.
So, what can we do to give ourselves every chance of being successful at property investment?
The following is a list of some factors we should consider as fundamental to ensuring we can read the gauges.
- have a very good understanding of your family’s cash flow position and surplus (profitability)
- allocate an amount of the family’s cash flow surplus to investment
- perform cash flow analysis for each property being considered and ensure it falls within the cash flow amount allocated to investment
- always include buffers for those factors that can have a negative influence on family and property investment cash flow – interest rate rises, drop in income, rental vacancy periods etc
- ensure both personal and investment buffers are created to cover any unexpected expenses
Don’t be an average investor. It’s not that difficult to get it right!