I don’t know about you but I think it’s exciting that we live in a world of constant change, when that change is for the better, of course! It’s an obvious thing to say but in many areas of our lives the pace of change is getting faster with every passing day. I was really struck by this the other day when I was musing on the preconceived and wrong ideas some people have about property investing.
The thought occurred to me that although mis-held views about property are probably pretty much the same as when I first started investing some ten years ago, the reasons why those views are wrong are now totally different. So in no particular order let me deal with and squash 5 of the most common myths that I hear about property investing.
In any defined time period, the stock market has consistently out-performed property.
As a politician would say, this is being ‘economical with the truth’. There have been times when the headline growth of the top shares on the stock market have outperformed the growth of average house price increases. There have also been plenty of times when house price increases have out performed the top shares. However, what these figures never show is that, given that it is far easier for an average person to ‘leverage’ their money in property than in shares, they will almost always do considerably better investing their money in shares than by investing in the stock market.
It always makes me laugh when I see articles and headlines saying that the stock market has out-performed property over any given period of time. Let’s just put this into a sense of perspective. On December 31st 1999 the FTSE 100 stood at just under seven thousand. At the same time, according to the Nationwide, the average price of a house in the UK stood at around sixty thousand pounds.
Today, as I write, the FTSE 100 stands at six thousand five hundred still lower than where it stood at the beginning of the millennium.
By contrast, today, according to the Nationwide, the average price of a house in the UK is now one hundred and seventy thousand pounds, almost three times the value back at the beginning of year 2000.
I rest my case.
In the meantime the stock market has been as volatile as any asset market and many investors could easily be tempted to move their funds into something more stable like property.
But before I finish my rant about the stock market just think about this. The companies represented in the FTSE 100 are changed on a regular basis. Well performing companies are brought in whilst companies that are performing poorly are moved out. This means that we are not even comparing like with like, apples with apples, and pears with pears. The house price indices do not move poor performing properties out and replace them with better performing properties. If the Nationwide decided that terraced houses at the moment were not performing too well but instead decided to calculate their index by bringing in better performing foreign properties, we would see that the index is completely distorted. I realise this is a ridiculous example but this is, in effect, what the FTSE 100 is doing.
If we were to compare the FTSE with property as the FTSE would have been if the poor performing companies hadn’t been replaced then I am sure that it would be at a much lower level even than the six thousand five hundred today.
So we can see that property has not only out-performed the FTSE three times over, but in reality it is probably more like four, five or six times.
Property investing is too much trouble.
My experience suggests there is a hard way and an easy way, but it is relatively easy for an investor chose which way they want to go.
Why would anyone want to go the hard way? Going back to an earlier answer it is generally true that the rewards are in direct proportion to the risk you are prepared to take, but also in proportion to the amount of effort you are prepared to put in.
Property can be relatively trouble free although it comes at a price. That price is giving up some of the rewards to others. However, if you have little time to put in, or are not confident of your own abilities, that might be a price you consider worth paying.
So for example, it is relatively easy to find a property which is fully packaged. Someone else will find the property, negotiate the deal, arrange the finance, oversee the solicitors and when you have bought it they’ll manage it for you. It is entirely possible for property investing to be totally-hands off but at each stage you’ll be giving up more of your ‘profit’ to compensate whoever is ‘doing the doing’.
Not every packaged deal is a good deal, in fact some I’ve seen have been very suspect. Some are good deals and if you can find the right one then property investing should be relatively trouble free.
Anyone can make money in property.
Obviously not everyone ‘will’ make money in property. Some people are not interested, some people don’t try, some people are happy making their money aside from property and that is fair enough.
But over the last few years a lot of material has been produced by a lot of experts covering many different aspects of property investing. Many of these experts have spent a lot of time developing and teaching a systemised approach to property. True, it’s not completely idiot proof, but a solid plan based on a proven system, implemented with persistence and energy, should succeed. Most people can follow a system if it’s explained clearly.
So the answer to this one is that anyone who wants to succeed in property should be able to, if they are prepared to put in the time and the effort. Certainly lack of knowledge is no longer an excuse. This doesn’t mean that it is all going fall into your lap. It doesn’t mean it’s going to be easy. It will require research, and hard work, and the willingness to be knocked back and to pick oneself up again.
Property investing is the worlds greatest get rich quick scheme.
The retort a few years ago would have been “Unfortunately that’s not true but property can be a great ‘get rich slowly’ scheme!” but today I’m not convinced that this idea is so totally off the wall.
Some entrepreneurial types have made large amounts of money very quickly, usually in proportion to the size of the deal they have taken on. The speed of their wealth creation has often also been in direct proportion to the amount of risk which they, personally, have been prepared to take.
I’m not saying that making a lot of money in property quickly is easy, I’m just saying that with some careful planning and some hard work it is possible. I’ve already referred to finding a cash-rich JV partner. Find the right deal, put the two together, and you could be off and running.
There is also, perhaps, a more modest explanation although whether you think it is legitimate will depend on how you define ‘rich’. With the market subdued it is still possible for buyers to search for properties which they can buy with substantial discounts. Some investors are routinely buying property with discounts of 20, 25% 30% or even more from the true current value. So, depending on the value of the property, even just one or two deals can make an investor an impressive amount of equity i.e make someone rich.
You need have loads of money to get started in property.
A question I’m often asked is “do I need money to start in property?” A few years ago I would have responded by quoting Dr Dolf de Roos who said words to the effect of “Yes, you do need money to start in property. But the good news is that it doesn’t have to be your money. Other people’s money works just as well”.
That’s still true and JV’ing with someone who is ‘cash rich but time poor’ is a way many newbies get started. Even so, over the last few years, people who are cleverer than me have spent a lot of time developing new ways of doing property investing. From time to time new ‘No Money Down’ techniques will emerge, adapted to the conditions of the day. A few years ago we had ‘bridging with same day refinancing’.
Today, with banks being somewhat uncooperative, new techniques try to cut them out altogether, or to at least weaken the banks power to veto. So we’ve seen options become extremely popular. In fact there are numerous ways of doing options, and an increasing number of investors trying ‘sandwich options’ and all sorts.
For those who don’t want to buy or grant options, or where circumstances make that approach inappropriate, some investors are using ‘instalment contracts’.