Forget the upside when buying.

Discussion in 'Investment Strategy' started by Sackie, 7th Jul, 2021.

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  1. Sackie

    Sackie Well-Known Member

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    Just sharing my 0.05c on an opinion of one possible way to approach investing in residential RE. If some points resonates with/or helps newbies in any way then even better. As always, DYOR before incorporating any advice you get from anyone.

    I was having a phone call discussion with 2 very good friends of mine and extremely successful businessmen, one who has been investing for about 40 years and the other has been investing a similar time to me, around 20 years. We were talking about investment strategy and deals we've done over the years which worked out very well, some which were average and a few which were terrible, ie poor return on investment. And after around 30 mins of chatting, we arrived at a central theme which all 3 of us had paid extreme attention to over the years which we feel has let us stay in the game long enough to benefit from the ups and downs as well as (most importantly) staying alive in the game to live another day, another month, another year to let our investments compound.

    What the 3 of us had focused on (and I'm sure others on here do as well) the most with every single deal wasn't how much growth we project in 1, 3, 5 years. Or how much money we stand to make, expect to make, hope to make by year X, or in whatever timeframe. We never focus on the upside.

    We almost always focused on the downside. Specifically, protecting our downside. Basically almost every decision we made was risk based. Just going through in point form some of our ways we tried to cover the downside. For others, some of these items won't make sense but these were OUR risk factors looked at. Yours may differ. And I'm sure many of these will seem obvious to some here. In no particular order:



    - Buy value, relative to comparable sales, Don't focus on the price, but the overall value.
    - Buy in high demand OO areas.
    - Never buy with emotions as much as possible.
    - Try to always make offers on 3,4,5 properties which are all acceptable to you. Negotiate hard where possible. Never make decisions out of desperation.
    - Buy in potential ripple suburb areas (if you see value)
    - Do not over commit financially on any 1 asset.
    - Do not let NCF be significant UNLESS the deal has solid add value ability AND you can financially take on such a deal.
    - Do not buy in booming markets if they have already been growing strongly for the last 3-4 years.
    - ALWAYS maintain strong liquid buffers if needed.
    - Expand those buffers as your portfolio grows
    - Always engage PMs to do thorough background checks on tenants, check income, bank accounts etc.
    - Stay away from main streets, electric poles, cemeteries.
    - Diversify your portfolio across at least the 3 major states with highest demand.
    - Focus on homes in Sydney, Melb and Brisbane. To a lesser degree units in Sydney
    - Never buy OTP units.
    - Never buy new anything
    - always have multiple exit points for any development project.
    - Never buy a property just because the rents look enticing
    - do not buy in a suburb which is dominated by renters
    - Always buy something with add value potential (this was a key factor for all 3 of us)
    - Avoid flood areas completely.
    - Always do BnP.
    - Do not stinge on seeking the best legal and tax advise for your portfolio.
    - Never buy in a high-rise buildings.
    - If buying units, always smaller, boutique blocks.
    - Always buy what the dominant stock type is for the particular suburb. If its homes, buy homes. Dont be the smart ass who buys units when there's 1 unit for every 6 homes.
    - Never buy lifestyle investments unless it fits your risk tolerances.
    - Never buy in mining towns regardless of how enticing the rents are.
    - ALWAYS have LL insurance.
    - Address any health hazards or risks in your properties ASAP. No ifs no buts.
    - Always have competent lawyers looking over any contracts or legal documents.
    - Keep good relations with all good tenants. Gifting where appropriate.
    - Do not renew lease for difficult tenants
    - Do not accept anything less than 12 months lease ( unless it suits your plans)
    - Try to buy when markets are steady or just starting to rise in price.
    - Look for buying opportunities when SOM is decreasing, discount percentage is decreasing, and ACRs are rising.
    - monitor quarterly growth trajectories
    - Never buy in a market which is currently falling hard. If there is a 20-25% retraction, look for value, negotiate hard to bag a deal, relative to long term value.
    -
    Take some money off the table in booming markets IF the asset has or can be sold for significantly more than you paid with a very strong ROI result. Then, look to keep some cash to reinvest at a later date, and reinvest the rest into other assets you deem to be at a lower buy in risk point.
    - Sell any duds which are performing poorly in a boom which has been going on for the last 12-18 months.
    - Never stop strengthening, maintaining and keeping a mindset which is conducive to good decision making.
    - Keep your emotions in check as much as possible.
    - Never, ever take your psychological capital for granted. Losing money can be made back a lot easier than it is to make back lost psychological capital.


    Take care of the downside as much as is possible and pragmatic, and the upside will usually take care of its self in time. At the very least, you should stay alive in the game long enough to fight another day.
     
    Last edited: 8th Jul, 2021
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  2. Mick Butterfield

    Mick Butterfield Well-Known Member

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    There are some great pieces of information here @Sackie. A lot of is does come down to common sense which is in many cases not all that common. These guidelines along with your level of dedication and drive are sure to see amazing results.
     
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  3. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Everything you need to know in one post.
     
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  4. skater

    skater Well-Known Member

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  5. spoon

    spoon Well-Known Member

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    Thanks @Sackie Printed in my PC wisdom file. Nicely fit onto a one-page. You must have formatted it for printing...:D
     
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  6. Sackie

    Sackie Well-Known Member

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    Glad you got something out of it. Makes it worth writing up:)
     
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  7. catnip

    catnip Member

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    In other words, pick your battles, win the war ;)

    The consensus I got from reading (and creating) portfolio projections is that time x compounding makes up the most of gains... as long as we are consistent and willing to stick to portfolio building till one day is suddenly today.
     
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  8. Piston_Broke

    Piston_Broke Well-Known Member

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    Great post indeed.

    RE has been a bull market for a long time, so as long as your risks are covered and you make through worse case scenario, it's only up from there.
    And given that for the last 30 yrs that hasn't been much of a "worse case" the sailing has been fairly smooth.

    Occasionaly you get put in the doom n gloom category for mentioning such things, but that's just part of the fun.
     
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  9. Vino

    Vino Member

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    Thanks @Sackie, really appreciate it.
     
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  10. Sackie

    Sackie Well-Known Member

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    Np.
     
  11. DOSHman

    DOSHman Well-Known Member

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  12. PinkPanther

    PinkPanther Well-Known Member

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    Thank you @Sackie
    Those were free gold nuggets for everyone to grab
     
  13. mkbonline

    mkbonline Well-Known Member

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    @Sackie "- "Do not buy in booming markets if they have already been growing strongly for the last 3-4 years". So basically dont property buy now and potentially for foreseeable future. May be invest in share and build your initial property deposit for next 6 months using shares:D
     
  14. Bris developer

    Bris developer Well-Known Member

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    This really resonates with me. Every wealthy person I know is Conservative & risk averse. you must never erode your capital base with a large loss. I joined a private equity group a few years back who were largely dabbling with other people‘s money and it was very hard for us to work together - as they could only ever see upside and easy gains on grossly overpriced deals.

    every piece of Real Estate I ever bought I worked on the assumption that if it was never to go up in price.. I was happy to hold it either for the yield or the land scarcity/location/wow factor/value add.

    as your portfolio grows into the 8digits… liquidity buffers and cashflow become key.