Interview with a Property Investor

 

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I get asked all the time about investing in property overseas, but investment property is not an asset class I have any personal experience with. Luckily I have a friend who I have watched go from beginner to professional investor over the course of many years, and I have persuaded him to share some of his knowledge with us. Although he is back living in the UK now, Graeme lived in Japan for almost 20 years, and built up a large chunk of his property portfolio while he was living here. He was not a “rich expat”, just a guy with a regular job. He values his privacy, so I’m not going to publish his full name and contact details, but if you have any questions for him he is happy to answer them through the blog. I hope you enjoy the interview and find some value in his knowledge:

SMA: How did you come to live in Japan?

G: I came here directly from university and like many people, planned to stay only a few years. In the end I stayed a lot longer and thoroughly enjoyed my time in Japan.

SMA: What made you start investing?

G: A good friend recommended the personal finance book Rich Dad Poor Dad. The book was written in plain English whereas other finance books used complicated terminology and were difficult to understand. Reading this book I realized I did not have a financial plan for the future. This concern about not having financial control of my future was the starting point.

SMA: Can anyone really become a property investor?

G: In my experience not everyone is cut out to be a successful property investor. One mistake people make is to think property is a get-rich-quick scheme, but it takes time to be successful. If, however, you surround yourself with good people and the right knowledge, property can develop into a dependable source of income for the months, years, decades and even generations to come.

Not everyone can make it as a successful investor and a personal example comes from a couple of years ago when I enrolled in a property-investing course.  About 40% of the participants did nothing with the information, 50% turned property into a hobby and now make some money from it and 10% are becoming extremely successful and gaining financial freedom. Anyone can go on a property course but you have to be motivated to be successful.

Ask yourself the question: How motivated am I to be a property investor? If the answer is less than 75% I wouldn’t bother. However if you are serious then it is worth getting educated, taking action and making a positive impact on your financial future.

SMA: Don’t I need a lot of money for this?

G: No, you don’t need as much money compared to other investments. For example, the average stock investor who wants to buy $100,000 of stocks needs to invest $100,000. However a property investor who wants to buy a $100,000 property only needs to invest $25,000 because the rest can be secured with a mortgage on a low interest rate.

This is one of the big differences between the stock market and property and gives you hard evidence about which one is more secure, because your bank will not give you money to invest in the stock market but will give you money to invest in a property. The ability to intelligently use other people’s money through leverage is one of the key skills of a good property investor. (SMA – leverage is available for stocks, but only for highly qualified investors)

SMA: What is the first thing I should do if I want to invest in  property?

G: Many people think the first thing to do when you invest in property is find a good location, others think the first thing to do is find a good property. Both of these things are important, however they are not the first thing to do.

Before anything else it is wise to consider your property strategy.

Your strategy is an overall plan to know in which direction you want to move. Strategy is crucial because it drives all your decisions and actions. Having a clear property strategy means answering questions such as:

* What is your long-term goal?

* What specifically do you want to achieve and gain from property?  – Do you want monthly cash flow from rental income or do you want large chunks of money from capital gains?

* Do you want to invest in small buy-to-let properties at the cheaper end of the market, or do you want to invest in multi-let properties, which cost more and have more regulations but offer a bigger return?

* Or do you want to focus on a strategy such as social housing, which is a longer-term project, perhaps in riskier parts of a town, but can give you a steady return?

* Or you may choose to focus on flipping property and making larger sums of money by buying distressed property, refurbishing them to a high standard and selling them for a good profit.

Once you have a clear strategy, next consider your area:

* How well does your area suit your strategy?

* What are the strengths and weaknesses of investing in this area?  – What types of tenant live in the area (families, unemployed, young professionals, students)

* In which direction is the area heading?

* Who can give you the information you need to choose a good investing area?

The more you understand your area the better your chance of success is.

Finally, focus on individual properties. This is when you start viewings and making offers. Viewing properties means identifying necessary repairs, calculating the cost of repairs and then having a trustworthy team in place to first refurbish and then manage the sale or rent.

The acronym to remember is SAP – Strategy. Area. Property.

First formulate your long-term strategy, next learn about a suitable area, and then start viewing and offering on properties.

The average, uneducated investor just goes out and buys a property without knowing enough about their property team, the area, and without a clear, long-term strategy for financial success. This is why so many investors get into trouble, with long voids, difficult tenants, or members of a property team who are a liability rather than an asset.

So, for safety and speed remember- S.A.P!!

SMA: How can someone in Asia get financing in the UK?

G: Raising money is one of the tests to see if you are truly motivated to be a property investor.

First of all you may have your own money to invest. If not, there are many ways of getting finance and today we will focus on bank mortgages. It often depends on your individual situation, for example there is international bank lending from big banks such as Nat West, Barclays and HSBC. These banks offer international loans. Of course they will ask a lot of questions and whether you get a mortgage usually depends on your existing relationship with that bank. If you have a good credit history with them you have a much better chance of getting the money.

Another possibility is to visit your local bank in Japan/Asia as they may have a relationship with a bank in your investing area. If so you may be able to borrow on property in your target location. The first thing to do is speak with your local bank and find out their international banking relationships.

A further option is working with a close family member in your investing country who can get a mortgage for you and will own the property. Together you sign a deed of trust so that you actually control the property and benefit from the rental income.

Whichever method you choose, ultimately your goal is to build a track record with a bank so you can borrow easily in your investing country.

A final point on this topic is that you don’t need to buy a property to financially benefit from it. With as little as $5,000 pounds you can angel invest and support professional property investors with a return of 6 – 10% and your money back within 8 months. A more complex option is to use lease options to control property. These strategies will be explored in future posts.

 SMA: What’s the difference between investing in the UK and in Japan?

G: You can make money from property in any country. There are however some important differences to remember. The main difference between Japan and the UK is that Japan is a rental income market, whereas the UK is a rental income and capital gain market. In Japan, the land typically holds its value but the property devalues. If you invest in the right area the income generating opportunity is quite strong, particularly compared to keeping money in the bank. In the UK, property is built to last and generally prices increase over time so you have the double benefit of rental income, and when you sell the property you should make a profit, sometimes a substantial one.

 SMA: Are you concerned about Brexit?

Brexit is a great opportunity for overseas property investors!

Since the referendum the pound has crashed and anybody transferring currency to the UK will see a massive difference. Your foreign currency is now worth 10% to 40% more than pre-Brexit vote, which means you can buy more property, and with historically low interest rates, now could be the best time to invest in the UK.

Furthermore if you start a limited company to hold your portfolio, from 2020 the corporation tax will be reduced to 17%. As tax is one of your greatest expenses this is an important factor.

Yes, there are some concerns about our relationship with Europe which will need ironing out, but people will always need a place to live and unlike Japan the U.K’s population is growing, which means more demand for the same number of houses.

We also need to consider that in certain areas, investment is already flowing into the UK. Examples of this are in the northern towns of England with new intercity train lines planned (HS2). In Yorkshire, Hull’s European City of Culture Year, combined with the opening of Siemens 310 million pound wind turbine factory, represents a big boost for property and property investors by bringing long-term jobs and money to the area.

SMA: Where do you see yourself in 10 years time?

G: My career has been in teaching and property investing so I would like to combine these two skill sets and become a property mentor. I have been strongly supported by inspiring property mentors, therefore to help other motivated people move forward and achieve their financial goals would be a dream come true.

SMA: Thanks Graeme, we look forward to talking with you more soon!

Winter is Coming!

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By now you may be tired of talk of diversification and asset allocation. Surely there are more interesting things we can talk about with regards to investment? I agree, it can get pretty dry. However, there is a reason we keep coming back to these fundamentals: financial markets have different seasons, and the number one reason that people fail at investing is fear of winter:

Correction – when any market falls by at least 10% from its peak.

Bear Market – when any market falls by at least 20% from its peak.

Fear of these financial winters lead otherwise intelligent people to do some strange things. It wasn’t just stupid people that sold everything at the end of 2008 / early 2009. It wasn’t only fools who sat on the sidelines and did nothing as the market rebounded spectacularly through 2009 and beyond. So how do we overcome this fear of financial winter? Firstly, by understanding it better:

  • On average there has been a market correction every year since 1900.
  • The average correction over the last 100 years has been 13.5%.
  • From 1980 to 2015 the average drop was 14.2%.
  • Historically, the average correction has lasted only 54 days.
  • Less than 20% of corrections have turned into a bear market.
  • Historically bear markets have happened every 3-5 years.
  • Historically the S&P 500 has dropped on average 33% during bear markets.
  • In more than a third of bear markets it has dropped more than 40%.
  • On average, bear markets have lasted about a year
  • Bull markets tend to commence when investor confidence is at a low point.
  • The market hit bottom on March 9th 2009 – the S&P 500 surged 69.5% in the 12 months that followed.

(from Unshakeable: Your Financial Freedom Playbook by Tony Robbins)

You may be surprised to hear that corrections happen so frequently. This means the next one could come at any time. If you follow the news, and in particular the financial news, there are always multiple reasons to be fearful: terrorism, North Korea, conflict in the Middle East, slumping oil prices, budget standoffs, Brexit!

Then there are the doomsday guys who are forever warning of the coming crash. If you listen to these people you will never be able to get started investing. But how often are they actually right? Well if you consistently warn of a coming crash you will always be right eventually! Tony Robbins’ book has a brilliant section where he shows 33 instances of “experts” warning of a market downturn over a three year period, where the market actually went up instead.

Here’s the key: in the years 1980 to 2015, the S&P 500 experienced an average intra-year decline of 14.2%. However, the market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time. You cannot afford to be sitting on the sidelines while this is happening. In fact, the opportunity cost of doing nothing will cost you far more than any of the corrections, bear markets, and flash crashes:

“From 1996 through 2015, the S&P 500 returned an average of 8.2% a year. But if you missed out on the top 10 trading days during those 20 years, your returns dwindled to just 4.5% a year. Can you believe it? Your returns would have been cut almost in half just by missing the 10 best trading days in 20 years! It gets worse! If you missed out on the top 20 trading days, your returns dropped from 8.2% a year to a paltry 2.1%. And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!” (from Unshakeable: Your Financial Freedom Playbook by Tony Robbins)

So we need to understand that winter is just one of four seasons and get back to the boring stuff: understand your risk profile, get your asset allocation right, rebalance annually, and ignore the noise!

Core vs Satellite

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So, you have completed your financial profile, worked out your base currency and risk profile, and committed to a strategic asset allocation that fits. You should be feeling pretty good about your investments. However, isn’t this all a little bit…boring? You just read that gold mining stocks are about to go on a tear, or your friend showed you a cool biotech fund you want to get into, or how about cryptocurrency? There are always going to be some more exciting investments out there with potentially big returns, but where do they fit into your strategic asset allocation? The answer is, they don’t!

Firstly, you should be very careful investing in “the next big thing”. Often, by the time you hear about a cool new opportunity from your friend at the bar, the smart money has already been invested for some time and is looking for suckers coming in late to sell to. Having said that, at any given time there may be really exciting long term investment opportunities for people willing to tolerate some extra risk. They are just a little “niche”.

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This is where you need to understand the concept of a core/satellite approach. Simply put, the core of your assets, that is 80-90% of your investments, should be in your strategic asset allocation. This is serious money that you are planning to spend later on important things like your kid’s education and your retirement. If you really want to invest in platinum, or alternative energy, or bitcoin then this should be considered a “satellite” holding. It’s perfectly ok to allocate 5% of your investments to something more speculative, just don’t go all in! Over time we will look at some potential satellite holdings that you may want to consider.

 

Strategic Asset Allocations

So what might an actual strategic asset allocation look like? This depends entirely on who you ask at any given time, but it’s good to have a general idea. Below are three examples for risk profiles Conservative, Balanced and Growth:

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Note how a conservative investor has a heavier weighting to cash and bonds, whereas a growth investor has a heavier weighting to equities. These are by no means set in stone and may vary from year to year, but they are not going to vary from month to month – if you are changing the allocation that often then you are behaving tactically. Professional investors do this as a matter of course: Their strategic weighting to domestic bonds may be 15%, but if they are currently negative on bonds for a particular reason, they may adjust this tactically back to 10% for a period. However, when they rebalance at the end of the year they will rebalance back to the original strategic weighting of 15%.

Here’s what a strategic asset allocation may look like with a “tactical overlay” (T) – a temporary adjustment for tactical reasons:

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Please note that these are not investment recommendations, they are simply examples to show you what certain asset allocations may look like. If this level of detail is a little overwhelming, don’t worry. We will look at ways to simplify this in future posts.

Buy Low, Sell High!

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I’m sure you have heard the mantra “buy low, sell high”. That’s because it is the number one objective of investing. But how do you actually go about this in a fast changing world without constantly having to watch the markets? The answer is more straightforward than you might think:

Let’s keep this really simple – say you have a portfolio that is 60% in stocks and 40% in bonds. (of course your portfolio will be much better diversified than this but we’re going for simple here!) Over the course of a year the stock market soars and the bonds stay about the same. You’ve had a really good year in your stocks. In fact, they’ve done so well that the balance of your portfolio has changed to 70% stocks and 30% bonds. Now, you haven’t changed anything yourself. It’s just that one of your asset classes has increased in value and therefore in weight.

Then the next year, guess what? The stock market continues to do well! Your bonds stay about the same and the stocks have such a great year that the value of your investment goes up significantly. And you go out and celebrate! Your asset allocation is working perfectly!

What you haven’t noticed is that now your portfolio is 80% stocks and only 20% bonds. And what happens the next year? Yes, you guessed it – the stock market crashes, you are over-exposed to it, and all those gains are wiped out…you failed in your attempt to buy low and sell high.

So how can this be averted? Simply, by rebalancing. At the end of the first year you automatically sell some of your stocks (selling high what you bought low) and buy bonds, restoring your asset allocation to 60/40. At the end of year two you do the same.

Then year three comes and the stock market goes down, but the 40% you have in bonds is there to protect you. In fact, it’s quite likely that bonds do well that year. So in that case, at the end of the year, you will sell the some of the bonds (high) and invest back into stocks (low). That’s it!

So, once you have understood your risk profile, and diversified into a blend of assets weighted to match that profile, the last thing to do is make sure you rebalance on a regular basis so the weightings don’t get out of whack.

Rebalancing annually is how you automatically buy low and sell high, without stressing yourself about the direction of the market.

 

Regular vs Lump Sum investing

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When talking about asset allocation, I mentioned that your strategy will need to be different depending on whether you are investing a small amount on a regular basis, or a lump sum at one time.

I would consider these two different types of money. Regular comes from your surplus over expenditure every month. It doesn’t drain your bank account. In fact, the maximum you should contribute to long term regular investments every month should be 50% of your monthly surplus. That way you don’t suddenly find yourself with cash flow trouble when a big bill comes in. Lump sum is money over and above your emergency cash reserve that you have accumulated in the bank. When you look at your asset weighting and find that you are overweight in cash, you might decide to make a lump sum investment into medium term assets in order to correct the overall weighting.

Now if you are going to invest $50,000 tomorrow, you will probably want to be very careful about your asset allocation, particularly if you have a low appetite for risk. If you invest all this money into equities, then a sudden correction or prolonged bear market could have a major effect on your capital. You would want to make sure you were diversified across a broad range of asset classes to protect the downside.

However, if you are starting a long term savings scheme for your retirement and investing $500 a month, then equity market volatility can be your friend. I’m sure by now you have heard the term Dollar Cost Averaging? If not, then take a look at this Investopedia article, which has a great video explaining how it works. A regular investment plan like this can be broken down into three stages:

  1. Capital accumulation – here’s where you take advantage of the averaging effect of buying shares every month. At this stage you can allocate 100% to equities.
  2. Diversified – at some point, when you have build up a weight of capital in the investment, and when current stock prices are higher than the average price you paid for them, you should diversify into an allocation that fits your strategic risk profile. There’s no fixed time frame for doing this. You need to review annually yourself or with your adviser, and when you feel you have built up enough capital that it has become a lump sum in itself, diversify across other assets.
  3. Pre-retirement – this doesn’t have to be about retirement necessarily, but when you get close to using the money you will need to switch to a more tactical allocation to preserve capital. This is typically in the last 1-3 years. During the crash in 2008, many people’s retirement accounts were hit because they were still in a growth focussed asset allocation – no problem for a young person but a disaster for someone about to retire and start spending the money.

I sometimes hear the term “set and forget” for long term investments, however you should be careful about this. Even a small monthly savings plan needs to be reviewed at least once a year to check if it’s time to move into the next allocation phase. Lump sum investments also need to be rebalanced regularly, and we will cover rebalancing shortly.

 

What’s your risk profile?

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We know already that asset allocation is the most important investment decision you will make. So how to decide what percentage of your money should be allocated to which assets? One factor is your stage in life: Young people have time on their side and are looking to grow their money over that time. Someone nearing retirement may no longer be looking for capital growth – they are going to need income from their investments and a significant drop in value would be damaging.

Another thing to consider is your risk tolerance. This can vary wildly from one person to another, even within your family, and it’s important to understand what level of risk you are able to bear.

The first part is to determine your investor experience. This can be summed up fairly simply:

Inexperienced Investor: You have invested in a limited range of asset classes for a period of less than four years and/or your investment knowledge is low or poor. However, you do understand that prices of securities may go up as well as down.

Experienced Investor: You have invested in various asset classes for a period of more than four years and have experienced volatility. Your investment knowledge is good and you acknowledge investment risk.

Professional Investor: You frequently trade various asset classes and have done so for more than four years. As an individual you have in excess of US$1.1 million of ‘investible’ assets and have extensive investment knowledge.

So what really separates an experienced investor from an inexperienced investor? The key term here is that you have “experienced volatility”. Simply put, if you have invested in a variety of assets for four years or more then you will have lost money somewhere!

The next part is to determine your risk tolerance. If you search online you will find numerous risk profiling questionnaires. Try one or two and see what results you get. For reference, here is a typical one from HSBC, and here is a more fun one from Rutgers.

Typically risk profiles are divided into two major categories:

  • Strategic – for long term planning,
  • Tactical – either aggressive trading, or focussed on a specific life stage such as pre-retirement, post retirement, or income generating

We won’t get into the tactical profiles today, suffice to say that needs can change with major life events. If you are retired then long term capital growth is less of a concern and your focus is likely to be on capital preservation and generating income.

Strategic Profiles:

  • Conservative – investors primarily interested in income and modest growth potential. The allocation is relatively defensive but has a modest exposure to growth assets. Looking for income and capital growth from investments.
  • Balanced – investors with some time until retirement. The allocation invests in

    a much broader range of assets than a typical balanced fund, which will result in lower potential for capital loss whilst at the same time offering growth potential. Looking for income and growth from investments, but more focussed on growth.

  • Growth – investors who have a longer investment time horizon, primarily interested in capital growth, and are comfortable with modest short-term capital losses. The allocation is biased towards growth assets, but still invests in a broader range of assets than a typical growth fund.
  • Alpha – investors who wish to adopt an aggressive approach, with the sole aim of long-term capital growth. Medium-term losses should be expected. The allocation is almost entirely biased towards equities and other growth assets.

The names and definitions of the strategic profiles may differ depending on who you ask. Alpha may be called adventurous, for example. The important thing is to start to understand where you fit in on the risk scale so you can plan your asset allocation accordingly.