7 Characteristics of a Prudent Property Investor
Last week, the team at PropertyInvesting.com hosted our annual Millionaire Mega Conference in Melbourne. Over 600 investors gathered for three days of inspiration and training on a wide range of topics. Experts presented ideas on personal development, financial management, leadership, persuasion, sales and marketing, negotiation, online business and, of course, real estate investing.
One of my workshop sessions was titled, “7 Characteristics of a Prudent Property Investor.” Having coached hundreds of investors through our Property Apprenticeship training programs, I’ve learned that one of the greatest areas most investors need help is in the area of due diligence.
I’m a fan of ancient Hebrew wisdom literature. One proverb that communicates the foundation of due diligence is this one, written by King Solomon of Israel:
“A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.”
Here Solomon contrasts two different types of investors: the “prudent” and the “simpleton.” A prudent person is one who acts with care and thought for the future.
This type of investor tends to increase in wealth, if for no other reason, they tend not to lose money. The simpleton on the other hand is foolish, naïve and gullible.
Due to their unwise investing practices, they often are forced to pay what one of our conference speakers called “stupid tax.”
That speaker was Keith Cunningham. He asked, “If you could unwind any three financial decisions, how much more money would you have?” The difference is your “stupid tax.”
I paid a hefty stupid tax back in the year 2000, not long after I graduated from university. Considering myself an expert in share investing, I went all-in on a technology company. It was just after the dot-com bubble burst, and I thought I was getting a bargain. Having watched these shares trade for months over $120, I picked them up for $55 per share. As a gullible simpleton, I was emotionally swayed by the analysts’ projections, who claimed these shares were headed for $500.
Long story short, having passed up an opportunity to sell for a profit at $75, I watched this company’s share price drop back to $55, then $45, then $35, and then all the way down to about $2 per share, where I eventually sold them.
Perhaps you can relate to that story. Most of us have paid our fair share of stupid tax. The good news is, you can transform yourself from a simpleton investor into a prudent investor. In my first-ever property investment, about six years after my share-trading debacle, I partnered with another investor in a small four-unit development.
In that deal, I made a quick-cash profit of about $25,000 in a little over 12 months. It wasn’t a fortune, but it was certainly a win, and it sure beat losing money. I credit that success both to my partner’s skill and experience and my new found wisdom, having read Steve McKnight’s From 0 to 260 Properties in 7 Years.
In the world of property, there are plenty of real estate professionals seeking to prey on peoples’ naivety and gullibility. If you’ve inspected any properties at all, you’ve likely heard assertions like these:
- “This would make a great investment.”
- “You can expect significant capital growth in this area.”
- “You could easily raise the rent on this property by $50 per week.”
- “You could surely build four units on this size block.”
It’s not only the property professionals that we must watch out for. Other dangers lurk in the shadows, and you see them every time you look in the mirror.
After I go to inspect a property for a potential subdivision and development, I estimate a potential profit based on certain assumptions. These assumptions include council approval, purchase price, improvement costs and sales price, just to name a few. At this point, as King Solomon told us, “a prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.”
As investors, it’s our job to confirm the accuracy of others’ assertions, as well as our own assumptions. As Steve McKnight says, “Due diligence is all about separating the facts from the opinions.”
Here are seven characteristics of a prudent property investor:
1. The Prudent Investor Has An Informed Opinion On The Broader Market
With interest rates currently at record lows and property values at record highs, every man and his dog seems to have an opinion on where real estate prices are headed.
Even our own regulators are unable to agree on the current state of the housing market. Check out a few of these quotes:
- “When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney, unequivocal… It’s certainly the case in the higher priced areas of Melbourne…” – John Fraser, Treasury Secretary and RBA Board Member.
- “I don’t think there is a housing bubble. I think housing prices have gone up but it went up higher in the early 2000s…” – Josh Frydenberg, Assistant Treasurer.
At the end of the day, it doesn’t matter what regulators, politicians and the media believe about the future of property. All that matters is where you see property prices headed.
Your opinion on the broader property market will frame your strategy of investing. If you believe values will continue to rise, then a buy and hold approach may be in the cards. If, on the other hand, you believe property values are topping out and at risk of decline, then you may be more inclined to do quick-cash deals to get in and then out of the market in a short period of time.
2. The Prudent Investor Has Clear Goals And A Defined Strategy For Growth
In our Property Apprenticeship course, we teach investors early on to know the difference between speculation, which is a common approach for the simpleton, and being outcome focused.
Speculators acquire assets and hope for the best. Often echoing lottery ticket buyers, they contest, “You’ve gotta be in it to win it!”
Outcome-focused investors are more calculated and deliberate. They begin with the end in mind, both long-term and with each individual property. They apply a clearly thought out strategic plan to carry them to their pre-determined goal.
Before you invest in real estate, clarify your win by asking some key questions, like:
- How much passive income will you need to replace the amount your job currently pays you?
- What yield will you expect from your investments?
- How much capital will you need to produce your desired level of income?
- What must you accomplish in the next 12 months to be on track toward your long-term goal?
Once you can answer these questions, you’ll know to buy only the deals that will take you to your desired end.
3. The Prudent Investor Has A Written Deal Profile
A deal profile clearly defines the exact type of property you are searching for. Once you’ve allowed your goal to guide your strategy, your strategy will then guide you to your deal profile.
A deal profile narrows your focus and allows you to target specific types of real estate that will meet your desired profit objective. It also will give agents a clear picture of what you’re looking for, which will really help you get others on board helping you find deals.
As Steve McKnight says, “If you don’t know what you’re looking for, then any and every deal looks good.”
4. The Prudent Investor Has A System For Researching And Assessing Areas
One of the first questions investors seek to answer is, “Where should I buy?”
Most go from seminar to seminar to hear the latest ruminations of “hot-spotting” experts. Rather than rely on the opinions of others, prudent investors learn how to make up their own minds about where to invest.
We teach our investors to become an area expert. This is someone who has researched an area to the point that they know it as well as someone who has lived there for five or more years.
Area experts know what represents good value in a particular suburb, they know how the area is performing economically and they are aware of the local people’s preferences.
You might also find this article helpful: “8 Crucial Questions for Determining Where to Buy Your Next Investment Property.”
5. The Prudent Investor Has A System For Assessing And Inspecting Properties
Once you determine which area you want to invest in, it’s time to find a property to buy. You will answer this all-important question, “Which deal best matches my desired profit outcome?”
The simpleton investor will put very little forethought into answering this question. They come to the market assuming all properties will always go up in value. Prudent investors, however, tend to arrive at better-quality investment decisions.
Assessing a property requires that you consider your target market and put yourself in the shoes of the person who will buy or rent your property. You should consider everything, from the cosmetic and structural condition of the property, to the property layout, floor plan and land size.
In our Property Apprenticeship course, we offer templates for assessing properties and for carrying out inspections. The more you can systematise this process, the better.
A prudent investor will generally inspect a property at least twice before committing to buy. If the property passes your preliminary inspection, the next test is to confirm that it passes your follow-up detailed inspection.
6. The Prudent Investor Has An Awareness Of How To Use Basic Number Crunching Formulas
Most investors make multi-six-figure financial decisions based on emotion, gut feelings or another person’s opinion.
Prudent investors are much better calculated and disciplined. They base their decisions on solid facts and take responsibility for their own financial futures.
By using a few simple calculations, you can quantify the outcome of an investment decision, and clearly see how the deal stacks up in relation to other opportunities. Whether you’re considering buying a new property, or selling a property you already own, you should be using some basic formulas to guide you.
For more insights, check out my article, “5 Formulas for Evaluating Property Deals.”
7. The Prudent Investor Has An Understanding Of How To Submit Wise Offers
Making offers on properties is especially challenging for the first-time investor. This is the point where you must put yourself out there. It’s the moment where you first risk thousands of dollars of deposit money, and potentially a significant amount of debt.
But, if you know what you’re doing, you can secure a property through an offer without fully committing yourself. After a property passes your preliminary inspection and due diligence, it’s a good idea to make an offer. That way, you can tie up the property to avoid losing it to another investor. As long as you include the appropriate clause, you can continue your more detailed inspection and due diligence. Then you can make a decision later as to whether or not to follow through with the purchase.
For more on “get-out clauses” and how to make wise offers, check out my article, “4 Simple Rules for Submitting Offers.”
In his book, The Intelligent Investor, Benjamin Graham says, “Business is most intelligent when it is most businesslike.” One of our chief aims through Steve McKnight’s Property Apprenticeship course is to train and equip investors to be more businesslike.
Simpletons treat their property investing like a hobby. The prudent treat their property investing like a business.
Click here to be redirected to my online calendar, where you can set up an appointment to discuss our training options further. I’ll share with you exactly how we can equip you in your journey toward greater prudence.