10 biggest lessons of 2012 for property investors!

Private Property South Africa
Scott Picken

Dear Property Investors

“The man who trades freedom for security, does not deserve nor will he receive either.” Benjamin Franklin

Wow another year has gone by and I am either getting older, the year’s uncertainties are increasing or the years are getting longer, as I am really looking forward to a break. Before we end for the year, I wanted to share with you the 10 biggest lessons of 2012 for property investors!

Lesson one: People vs Property

  • Most investors in property want to use their gut feel to invest in property. They focus on their knowledge and experience to make these decisions and over time they build up a successful track record in purchasing great investments properties. Then they want to invest overseas and they fly over to a place like London, Sydney or Atlanta and they try and used the same tried and trusted technique to acquire investment property in a week. I always ask people, “How successful would an American be if they arrived in JHB for a week and tried to buy an investment property?” If one is honest with themselves they would agree that there is no chance. Therefore when you are investing overseas you need to change your strategy and if you don’t you will be part of the 80% of South Africans who lose money when they invest overseas. The focus has to change from the property to the people. You invest in people and if you have the right partners they will ensure that you are investing in the right areas, buying the right type of properties for your investment criteria and most importantly they will ensure that they can manage and maintain your asset – ensuring the long term sustainability of your investment long term. If you don’t have the right partners they will sell you properties in dodgy areas and then add a nice marketing angle (like 50% LTV and 8.2% financing) and you will be none the wiser until you learn about your mistake with time. An example of this is being offered in South Africa at the moment and both I and two of our clients went to look at these properties on the ground and everyone was shocked by the area, the fact that the value of the properties was $30k and they were being sold to South Africans at $66k. You see at IPS we invest in people and we pride ourselves on having the Best of Breed partners on the ground. When we did our due diligence, RJ who reviews over 5000 investment properties a month in Atlanta, gave us his views on these properties and basically said, “You can sometimes put lipstick on a pig, but it will still be a pig!” Click here to watch the video on Un-Weaving the truth about financing in USA property and also this video on Understanding the truth about USA property.

  • In international property, the people or partners you work with will determine your success long term!

Lesson Two: Clem Sunter - Scenario Planning & making educated decisions about your future, based on facts:

  • I often have debates with people whether it is better to invest locally or offshore. I maintain that as a positive and passionate South African there are great opportunities in South Africa and it is far easier to make R9 than $1, as we know the market, can manage the risks and exploit the opportunities. However once we have made some money, it is both prudent and imperative to invest in first world assets, currencies and income. Most people again use their gut feel, but I am currently working with Clem Sunter on a modelling technique to take his scenario planning and help us know where to invest – local or offshore, which countries to invest in and what to invest in. Nothing is perfect, but it provides a framework for you to make educated and informed decisions, based on facts. In conjunction with the modelling technique with Clem, I am also writing a book, to help you understand how you can use the methodology to make successful international property investment. We will also be doing a LIVE webinar together on the 19th of February to help you decide; no matter which scenario plays out for the future – both locally and globally – that you have a plan. Click here to join us

Lesson Three: Long term Investment

  • One of the overriding components which we South African’s have to take into account is the devaluation of the Rand and the impact this has on our Global Wealth. Many of our IPS Investors have taken action and I wanted to share with you the impact of the action they have taken long term:

Year

Aus Dollar

Change to now

Pound

Change to now

US Dollar

Change to now

2007

5.98

54%

14.14

0%

7.04

26%

2008

7.47

23%

15.54

-9%

7.81

14%

2009

6.23

48%

12.73

11%

7.74

15%

2010

6.47

42%

11.41

24%

7.63

17%

2011

7.25

27%

10.85

30%

6.77

31%

2012

9.2

0%

14.13

0%

8.89

0%

  • Basically this shows you how the Rand has changed against the major currencies and the returns our investors have made in Rand terms, based on your timing of investment. For example if you bought a property in June 2009 in Australia, you have made a 48% return on currency, independent of what has happened to the property market (see report later). In these graphs below it graphically illustrates these changes:

  • I work with a gentleman called James Paynter to understand the Rand. He has been analysing the Rand and predicting the future using a technique called Refined Elliott Principle. Since 2005 he has had an 81% accuracy on predicting where the Rand is going. He does this analysis for the US Dollar, Pound and Euro against the Rand and you can contact him on james@dynamicoutcomes.co.za for a special discount if you want to be kept up to date on where the Rand is going. We analysis his reports, which show that the Rand is going to be between R9.50 to R10.40 to the US Dollar in the next few months and R14.00 to R20.50 in the next few years. Scary stuff, if you haven’t planned for it. If you want to know how he does it and where the Rand is going then join us for the webinar early next year. Click here to sign up.

  • Basically when investing overseas you need to take at least a 5 year view on your investment.

Lesson Four: Clem Sunter’s – Price vs Probability

  • In analysing the markets globally there are many factors to take into account. However Clem Sunter says the most important component is the ratio of price (discount in the property) and the probability of which scenario is going to take place. Let me give you an example of two markets:

  • UK: Although I own a number of properties in London, I am concerned about the UK market at the moment for buying new property. If you own already it is great rental market with really low cost of financing. However to buy now is a problem. In 2008 when we had the GFC, the London market lost 15% on the whole and there were great discounts. However due to the fundamentals of supply and demand, this limited supply was snapped up and due to the fact that there has been very limited inventory coming back into the market, prices recovered by 17% in less than 12 months. Since then they have steadily grown, and it concerns me that many of the same risks of 2008 / 09 still exist with the sovereign debt, Europe’s issues, the fact that 70% of the UK’s GDP is based on banking and insurance and they have gone into another recession. With rates also so low there are very few motivated sellers who are being forced to sell. Therefore with prices at full value, with no allowance for the risk and limited motivated sellers, I find this a very tough market to invest in at the moment.

  • USA: Although I went to USA in 2010, and I found lots of opportunity, I was extremely concerned as I could not find partners on the ground that I could trust and I felt there was still a lot of pain in the market. In 2012 I went back with a different strategy and partnered with a company I have worked with since 2005 in the UK. They have helped over 1100 British and Irish Investors invest in USA in the last 6 years and the numbers are great. The average yields are between 15% and 20% and vacancies of less than 3 weeks. For this reason I travelled there in April and we did 8 cities in 11 days. We were so excited for 2 reason:

  • We can buy a 40% to 60% of replacement value

  • We don’t care what the highs of 2007 were, but we are interested in the fact we can buy property for more than 50% of what it costs to replace that building. This is a significant indication of value.

  • Partners on the ground to manage the property and collect the rent

  • You can buy a property at any discount, but unless you get the income then it is irrelevant. In 2010 I did not believe it was possible to receive this income due to partners I did not trust and also the fact the rental demand was weak. In 2012 we found fantastic partners and have full confidence in their ability to collect the rent, along with the fact that there is significant rental demand.

  • This is an example of Clem Sunter’s price vs probability ratio and is one of the reasons he believes USA is such a favourable destination at the moment.

  • Click here to join us on one of our USA Buyers Trips in 2013 or to come to The Great USA Investment Extravaganza!

Lesson Five: Information and financing USA property

  • As we always say there are only two components which are necessary to be successful in international property – you have to have the RIGHT Information and the RIGHT Partners. As explained already the option of financing in USA is a classic example. I have had a number of clients excited about getting 50% LTV and 8.2% financing in USA. However when proper due diligence was done it was found the properties were being bought for less than half the value they were being sold for and then the clients were being asked to put down a 50% deposit and finance the rest. Not only was this very dodgy, but these properties were in the worst suburbs and so no real prospect for the future. Click here to watch the video on Un-Weaving the truth about financing in USA property and also this video on Understanding the truth about USA property.

  • Through our partners, who have 82 offices around USA and specialise in financing property from the banks, I can show you how I am getting financing for 4.5% fixed for 30 years at a 70% LTV with complete transparency on the purchase price and no balloon payments. No brainer when you consider the net yields on most of the properties is more than 10%.

  • More than 80% of South Africans who invest offshore lose money as they don’t have the right information.

Lesson Six: Tax & structures vs property

  • It is interesting. We have been working with Grant Thornton (top 5 accounting firm in the world) to make sure that we had all the right answers for the tax, structures and compliance of owning property in USA. We have invested over R120k in getting this right and it has taken us over 6 months.

  • However in places like Atlanta the market has increased by 40% in those 6 months. As a mentor of mine, Dr Hannes Dreyer teaches, it is far better to buy the right property in the wrong structure, than to buy the wrong property in the right structure.

  • In USA, although I am chuffed we now have the right answers for the structure, in hindsight we would have been better off just buying the properties right away as what we might have lost in tax, we would have certainly gained in the movement of the market. This is especially true in USA where there are no transfer fees to move property from your own name to a structure or from different structures. For this reason in October, we made the executive decision to stop waiting for the structure and to get involved in buying as many properties as we could.

Lesson 7: Currency vs property growth

  • I learnt an extremely important lesson in Australia this year. Australia is always steady eddy and with a very strong government and economy (you can see that by how the Australian Dollar continues to increase. Currency is like a countries share price) it provides a stable investment. The fundamentals of supply and demand are in kilter with demand outstripping supply, although the increase in interest rates (8 times) has caused the market to go stagnant at the moment. In 2008, Australia dropped its interest rates from 8.75% to 3% in 4 months (more than 65%) and this shored up the property market. Along with other initiatives like the First Time Home Owners allowance and the fact that it was the only economy in the G20 to not go into recession, the Aus housing market grew by 8.6% in 2009. However since then they have been worried about inflation and have risen interest rates 8 times. This, as anywhere else in the world, had caused the market to slow significantly. If you are forced to sell now (same in South Africa) then the estate agents will give you really low values to create the sale and investors might even find they are below what they invested for.

  • However this needs to be taken in context as an investor who invested in June 2009, has made 48% on their Rand return. Therefore even if they have lost percentage points on the property, this is more than supported by a significant weakening of the Rand over this period. Forget the property, a 48% return over 3 years is a substantial gain and will be very hard to match in investments in South Africa.

  • Therefore we always take a 5 year view and as long as the property is earning income and we have made great returns on our Rand investment, then there is no reason not to ride the wave and wait for the market to turn again.

Lesson Eight: What we want vs Investment

  • I get this all the time. If it is not the ladies (sorry not chauvinistic, but it really often is) that tell me they want to redesign the house in Australia because they don’t like the bedroom at the front of the house, or the gentlemen who told me that he didn’t want to buy in Orlando as he didn’t like the window on the side of the house and it is not where he would live – investors need to realise it is not about them, but about what the locals in that country want. They will never live in their investments and so it is not so much about these personal components and far more about the investment, the numbers, the fundamentals and the returns. This is what our criteria is for investment and we rely on our partners on the ground to guide us with the right information to make the right decisions.

  • That client who did not buy the property in Orlando, due to the window, has lost out on 10% growth in that period, a 26% decrease in the value of the Rand and a property which has been rented since then.

  • I personally bought my first house in London in 2002, just after September 11th 2001 and all the doom mongers (allot of my friends) told me that it was a bad time to invest. Along with my friend we looked at properties we would like to live in, but eventually we settled for a property which ticked our investment criteria. Although we have had a rise in interest rates, global melt down, property crash, etc. this property has stood the test of time and produced a cashflow positive rental for us since day one. My point is don’t focus on all the macro issues, what you want in a house or any of the other reasons you give yourself to not make a decision. Focus on the fundamentals and it will pay you handsomely in the future!

  • Remember my primary lesson from 2011 was Income vs Growth. Those people who focus on growth will fail at some point as it is like betting against winter. Those that focus on income not only survive, but actually thrive in all economic conditions. This is one of the most important fundamentals which we focus on.

Lesson Nine: Collective buying power / Crowd Funding

  • Most of you have heard of funds, REIT’s or syndications, but have you heard of Crowd Funding which was one of the biggest trends of 2012. Basically this is the way of the future, will destroy the banks and give control to people through the use of the technology. In the past if you needed allot of money you went to a Venture Capitalist or a bank and raised money from one source. However websites like, www.kickstarter.com, www.pozible.com and www.indegogo.com have changed the business landscape forever. Now rather than raising $10 million from one source, you raise $100 from 100 000 people. This has been extremely successful for creative projects, entrepreneurship, etc, but not property, YET!

  • This is why this year we launched Wealth Migrate, with the mission is to provide a global, self service, crowd funding property solution, which takes advantage of local property markets, through best of breed partners and collective buying power. This will be optimised by a Global IT Platform, providing transparency and efficiency of property markets! It is a blend of nature's laws and technology.

  • Basically a simple solution to buy global property (residential and commercial) aggressively with like minded sophisticated investors and create global wealth.

  • The biggest differentiator is that there are no fees upfront, or in the middle and with complete transparency, the Wealth Migrate team (who are co-investors) will only benefit after the investors have made their returns. This is the way ethical business should be done and will revolutionise the property landscape like Google did to the internet.

  • Wealth Migrate, along with Real Estate Investor Magazine have launched a competition to find the best property investor in South Africa. Click here for more details. Our aim is to find the best investors in South Africa and help them find the best investments globally!

  • www.wealthmigrate.com

Lesson Ten: Having a baby, international property being tough, passports & 30 years time!

  • With my son being born on the 28th of Feb, it has been really tough doing our international investment trips, but I believe it is imperative for his future!

  • Some recent research has just come out which says that 33% of boys who are been born now will actually live to 100 and 40% of girls. As my son is nearly 9 months old, I think this is fascinating as there is no way a pension is going to last 35 years. I truly believe the only way forward for my son is to specialise in either global investments or entrepreneurship or both. By the time he is 30 the world will be completely global and people will not worry about where they live, but far rather where they can get the best returns. With access to all the right information, they will be completely diversified across countries, sectors, currencies, etc. It will be about being a global citizen – with focus on building up global assets and income.

  • This is in complete contrast with what many South African’s are doing at the moment. Let’s consider a market overview at the moment and where I am investing. Firstly as you know I don’t believe in buying property for passports. Spain just announced that you can possibly spend $200 000 and buy a property in Spain and then get residency. You must understand, this is to try and take up the slack of over 700 000 properties which are oversupplied. Spain is in the midst of a double-dip recession with 25 percent unemployment. As explained on the 20th November, Prime Minister Mariano Rajoy stressed that the plan has not yet been finalized, but added that Spain "needs to sell these homes" and that getting them off the market could help revive the nation's devastated construction industry. Once again a ploy by a country to stimulate foreign investment by giving away passports, in property markets that are in serious trouble. This is no different in Mauritius, Cyprus, USA through the EB5, Malta, Portugal, etc. As I always say, it is like buying a boat, “Nice to have, but not an investment.” My belief is if you focus on buying the right investments, accumulating first world assets and income, then you become a global citizen and you can move to any country you like by buying your way in. This is why I personally focus on the UK, Australia and USA.

  • So as tough as it has been this year, I know that what I am doing is essential for my son’s future!

From the team at IPS, we wish you a very festive season with family and friends. As always, we try and keep you educated and informed so that you can “Invest with Confidence!”

Here’s to a fantastic holiday and an even better 2013!

Thanks

Scott Picken

IPS CEO

International Property Solutions

SA Tel: +27 (0) 11 463 0588

www.ipsinvest.com

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