How do Investors typically react to a crisis:
Someone once told me that you never know what a person is made of until you put them under pressure. In times of crisis, many areas of our lives are challenged, and each of us will react in a way that feels appropriate.
I’ve found that when property investors and aspiring property investors are put to the test, they typically react in one of 4 ways.
More than two million Australians own at least one investment property. However, this number is dwarfed by the volume of aspiring Australian property investors that are yet to enter the market. It’s important to add this group of aspiring investors to this exercise as any impact to buyer confidence has a direct impact on property prices.
Whilst the COVID-19 crisis is creating an unprecedented impact on global markets, it’s not the first crisis I’ve witnessed over my 30+ years of investing experience. Without trying to lessen the severity of this pandemic, it’s worth pointing out that other crisis periods have also been described as ‘unprecedented’. These were presented by the media through ‘Armageddon’ style headlines as conditions that would almost certainly create a property market crash.
For example, Australia’s last recession in the early 90’s saw our unemployment figures double at a time when property investors were paying up to 17% interest. Nonetheless, the property market survived. We were told to expect the worst when the GFC rocked the global markets in 2008, but Australian property prices boomed soon after. And our recent royal commission into banking created an unprecedented ‘credit squeeze’. This saw media headlines sending buyer confidence into a free-fall only to be followed by a strong property price rebound.
Regardless of the crisis, there is always a breakthrough point in time where the stormy market conditions come under control, and confidence starts to return. What defines us as investors is how we react in these challenging times.
Group 1: Investors who become ‘PANIC SELLERS’
We clearly see this reaction displayed via the roller coaster performance of the stock market when a crisis emerges. It’s in times like these that I find myself extremely grateful my investment passions lay with property and not with shares. It must be so unsettling to turn on the news in the morning and learn that billions were lost on the global stock markets overnight. Luckily property is far less liquid, making it much harder for property investors to sell if they become overwhelmed with fear.
Unfortunately, this fear felt by property investors is often due to a poor investment choice. I’ve found that in every crisis, investor stress is mostly self-created due to challenging market conditions providing a pressure test on your buying decision. This often exposes a lack of knowledge resulting in high-risk investment strategies. Regardless of the reason, this group of investors choose to offload their investment property as quickly as possible, often resulting in a disappointing investment experience. This disheartening incident often infects the investor with negativity around property investing for many years to follow.
Group 2: Investors who become ‘PROLONGED PROCRASTINATORS’.
A crisis can serve as proof that ‘only fools rush in’ to those investors already displaying a tendency to procrastinate around making an investment choice. Investors and aspiring investors who seamlessly look to find the right time to enter the property market can experience dangerous setbacks. They can find themselves permanently paralysed and unable to gain the confidence required to ever enter the property market.
Group 3: Investors who remain ‘LONG TERM INVESTORS’.
Most property investors understand that the best way to view their property portfolio is as a long-term investment. While short term investors can easily be exposed to the ebbs and flows of a property cycle, longer term investing has proven to display reassuring performance to this group of investors. Many of these investors have positioned themselves well for these uncertain times by accumulating properties with fewer risks and with smarter cash flow. A well-planned property investment strategy becomes a highly appreciated ‘safety net’, allowing well-planned investors to remain calm during uncertain market conditions.
Group 4: Investors who become ‘DYNAMIC WEALTH BUILDERS’.
A very small percentage of astute property investors will see any crisis as a time to increase their buying activity while confidence is low. These investors are incredibly well planned and often follow a very specific, unemotional criteria that allow them to ‘cherry-pick’ the best investment opportunities. Most of these opportunities will be supplied by the ‘Panic Sellers’ (group one) who choose to offload their properties at a time when there are very few buyers. Investors in this group are busy planning right now. They know that the COVID-19 crisis will provide them with opportunities to accelerate their wealth creation goals rapidly.
When the GFC created an ideal buying window, I used very detailed criteria to identify optimal investment opportunities. This preparation allowed me to confidently purchase fifteen investment properties in a fifteen-month period. Those properties offered strong positive cash flow from day one and quickly benefited from a breathtaking rebound to market confidence and property prices