property investment

Book review – 20 questions for property investors

Margaret Lomas, the author of 20 Must Ask Questions For Every Property Investor, is a financial adviser who has been operating in Australia for quite some time. And in her book, she discusses about a system to determine if a property is suitable to add into your portfolio.

Tl; dr;

After a rough filter of all regions that you can scan, an investor can apply 20 questions in a specific order to determine if the property is a great one to buy, or quickly eliminate it from the list.

Margaret Lomas believes that capital growth and cashflow can go together, and not mutually exclusive.

Why both capital growth and cashflow can go side by side?

With a good entry price, any property can have positive cashflow. And if you can pick a property before the growth happens, people will be left questioning how you have a great performing property. You do not need to pick the property just before the boom time, rather buying it when it shows all signals of growth, but the market has not moved to reflect the changes.

Since rental income will always be running after capital growth, most people will see the growth first and ignore the rental income when they are out there doing house hunting. But without a good rental income, it can be difficult to hold on to an investment property, especially when you are holding it negatively geared.

People who buy into an area with a steady growth in the past few years, can be left devastated because the growth time is coming to an end. This does NOT apply if the area still shows all growth signals and they are getting stronger. However, most property investors listen to property gurus, or their friends to determine if a particular area is a good place to buy. As a result, their approach is a buy and pray strategy, hoping that the property value will go up and they will enjoy the capital growth one day.

Some preparation before applying 20 questions.

The end goal for us is to choose a property with the best possible chance of growth, while sustain the highest possible cashflow that we can afford.

  • Determine the scanning area: first thing to do is to determine the top level area that we want to scan for a property. For me, it will be the whole Australia. For others, it can be just a city region, e.g. Melbourne regions; or a state, e.g. Victoria.
  • Workout how much you can afford: obtain a pre-approval from a financial institution. However, keep in mind that if the pre-approval says $500,000; it does not mean the bank will lend you that amount. But it will adjust to your financial situation when you actually apply.
  • Scan real estate websites like realestate.com.au or domain.com.au for possible properties that have their indicate price that suits your pre-approval. For example, I want to look for properties with price between $350,000 and $500,000; where the area’s average price is $500,000. Margaret’s argument is that these properties are in the lower end of the area, therefore it is easier to buy and to sell.
  • Dismiss properties in areas that have less than 15,000 population: these areas are too small to sustain a good population growth, and most likely they do not have a good infrastructure or diversified industries that can support a good population growth.
  • Determine the average yield of investment properties in the remaining areas: we want it to be around 4% to 5%. Anything lower or higher show signs of unsustainability.

What I learned after reading through 20 questions?

They are extremely detailed on what to look for in an area in the first 10 questions, which are only concern about the area’s economy, population growth, external and internal growth drivers. This can eliminate most properties in the above list already.

Then we apply the remaining 10 questions, which focus on the property itself. The good thing is that if we stick to the system, at the end, there may be just 1 or 2 properties left, or we are left with an empty list. This does not mean that the method is invalid, it just means that we need to be more patient and wait for a suitable property to come on market. Or just hire a buyer agent to search for us in those areas we choose.

Summary

Overall, this is the most detailed on a system of how to choose a property to invest in that I have ever read. However, property investment is an industry where many fake gurus reside. Whether or not the system is sound, I will need to implement for the upcoming purchase to have a sound proof.

If you want to read the book and discuss ideas, you can obtain a copy here.

By Tuan Nguyen

2 black swans

Book review – Black Swan

Black Swan is a phenomenal book that everyone should read. It discusses about the unexpected, and the impact that it has to our lives.

Tl; dr;

We should be more aware of unexpected events, as they bear significant consequences comparing to expected events. If we are aware that they can happen, we will tread more carefully in everything we do, especially in our investments.

The book can be yours here.

What is a Black Swan event?

The term “Black Swan” was coined by¬†Nassim Nicholas Taleb, in his book of the same name. A Black Swan event is an event that rarely happens. So rare that most people do not expect, or think that it is impossible to happen.

The inspiration of the term dates back to pre-colonial age. During that time, people believed that all swans are white. The belief was solid for hundreds of years. Then when the British came to Australia, they first encounter a swan with black feathers.

2 black swans

Black Swans (source: birdlife.org.au)

This discovery forfeited the belief that all swans are white, and completely unexpected. But it happened.

The same thing had happened in the past so many times, each time caused magnificent consequences. The “11 September”, GFC, and this Coronavirus health crisis, etc. are considered Black Swan events. All of them just happened, hardly nobody expected them, and bear (terrible) consequences.

To be classified as a Black Swan event, one must be completely unexpected. If we already know of a certain “risk”, it becomes a “Gray Swan”. For example we know that a plane crash is unlikely to happen, the chance is minimalistic. In this case, a plane crash is a Gray Swan event.

Why we should ignore the Gaussian bell curve?

Galton board

A Gaussian Bell curve represents the standard distribution of certain events. Statisticians use it to classify risks of various matters, from Casino machines to complicated financial products.

However, this model will never be able to handle extreme outliers, which normally bears the most consequences. The chance of such outlier is unbelievably small, and most of us will never see all beans tilt to the far left or the far right of the board above.

Let’s say a casino assessing risks for the business. They figured out the most harmful events that could happen are cheating, so they upgrade their machines, install cameras and other measures to prevent customers to play dodgy. This could save them, say a few millions of dollars a year. However, there are events that potentially screw up their profit, things like a staff accidentally pour water to the on-premise servers, causing the casino to shut down for a day; or a terrorist just happen to detonate a bomb inside the casino. These events are, like the managements say, impossible to happen. But when it happens, the whole business suffers, and can go bankrupt because of a single such event.

How do we become more aware of such events?

These events, as the definition says, completely unexpected. Therefore we can only be aware of something harmful could happen. We do not know exactly what, just need to open our minds that such events can happen.

When we are open to the concepts, we will be more careful to the things that we do. Sometimes redundancy is a good thing. Sometimes optimization exposes us to these Black Swans. Executives are prone to maximize their company profits, via various methods. One of which is optimizing operating cost. Let’s say they cut costs and only employ 1 person to do multiple things, the workload may be enough for 1 person. But if that person goes on leave, or be sick, then the whole optimization concept is exposed to certain consequences.

How do we capitalize on positive Black Swan events?

Not all Black Swan events are bad. Some are positive and can be capitalized upon. Considering a venture capital, they are the prime example for capturing the benefits of Black Swans. They know, statistically, that 95% of startups fail. However, they focus on the remaining 5%. Let’s say they fund 100 startups, they are exposed to the chance that 1 to 5 of them can be successful. And if they are, the venture capital fund can recover all the losses from the other 95 failed investments.

Black Swans can be subjective

An event can be a Black Swan to us, but may not be to others.

Considering this, a chicken that get fed everyday for 60 days. On the 61st day, it gets butchered. To the chicken, being killed is a Black Swan. Since all historical data points towards the prediction of being fed on the 61st day. However, to the butcher, it is not even considered an unusual event.

Summary

Being aware of Black Swan events can help us in our lives. We do not need to be too scared to do something, just because it potentially causes harm to us.

If you want to buy the book, you can get a copy here.

“Always hope for the best, but prepare for the worst.”

By Tuan Nguyen