NOTHING TO FEAR EXCEPT FEAR ITSELF
I have just concluded a 45 minute phone discussion with a potential investor who is hesitating in his decision to buy. The individual in question is in his early sixties and has retired from his employment in the teaching profession. He owns his own home outright and has superannuation savings of about $500,000 in his retail fund. He believes he requires about $50,000 annual income to fund his lifestyle. A portion of his income is derived from his super fund as an annual pension and he supplements his income with part time employment.
His main concern is to maintain his income as he ages without totally drawing on his super fund, which made a small loss in the last financial year. We proposed that he invest a small portion of his fund into buying a well-priced property with good capital growth potential, which over time will supplement his savings. That way he can either sell the property in the future with no tax implications or hold and allow the rent increases to keep pace with the CPI. During our conversation he vented his concerns over the “inflated” state of the property market. “I hesitate because I think prices will fall and I’m waiting for a buying opportunity” he commented to me.
I asked him if he recalled Black Monday, October 1987. He did. The stock market fell around 30% in a very short space of time. Shortly after that event property prices in Australia started to boom. In 1989 we experienced “the recession we had to have” and values plummeted. Home loan rates reached almost 20%. I recollect one buyer then telling me that property prices will never reach the peaks of the recent boom. In 2000 we had Y2K and the “Tech Wreck”, which was preceded by the Asia economic crisis in 1997 with the collapse of the Thai Baht. The year 2001 brought the tragedy of the Twin Towers, in 2008 we had the GFC followed by the Greek crisis and bailout and so it goes. Now we are focussing on China and concerns of an economic bubble. Over this entire period, property prices have continued their merry way to new highs with peaks and troughs along the way.
We all have stories of people who bought in the past only to regret that they did not follow suit. I myself bought a property 25 years ago. An identical piece of land near mine sold last week for almost 12 times the price I paid. Lucky I made that decision. Pity I didn’t buy the whole street way back then. By the way, it was actually my wife that bought it by putting her hand up at an auction and paying $6,000 over the odds. Boy was I furious. In hind sight, she was smarter than me. So back to my investor.
He remained sceptical during the call until he disclosed to me that he himself still owns a property in suburban Melbourne which he bought in the eighties for $50,000 prior to the introduction of capital gains tax. Can you believe that this individual still harboured doubts about the wisdom of taking action?
However, it gets more interesting. His adult son has significant cash savings, in the hundreds of thousands and he is anti-property, convinced that speculating on the stock market is giving him better and quicker returns. I shudder to think what his reaction would be to a 20% fall in the equity market. We suggested he consider splitting his investments to create a more balanced portfolio.
He owns no property and lives in rental accommodation. The father asked my advice. “Should he invest or occupy”. My advice was unequivocal. Recommend to him to buy his first property now, lease it to a tenant that will pay for some of the mortgage and continue to rent other premises. My axiom for young, first time buyers is “Buy where you can afford and rent where you want to live”. At least this way they can commence the journey to long term wealth creation without compromising their lifestyle. In addition it develops the habit of “good debt” as opposed to “bad debt”.
Now what of the investor and the end of our conversation. Despite all the evidence and his own experience he had developed “paralysis by analysis” and even admitted that he over thinks situations. My message to him was crystal clear. Life is too short to waste on “what if” scenarios. If the evidence points to a self-evident outcome and one has done some basic research to satisfy our curiosity, then act.
As one well known logo states… “Just Do It”.