There are pretty much only two kinds of property investor, active and passive, but it’s important to know the difference.
In the investment world generally the words active and passive tend to define an investment style which is either seeking to reflect the performance of the market (usually the share market), called a passive style or is seeking to outperform the market, known as an active style. There has been lots of debate over the years about the merits of both styles as well as the observation that both tend to end up under-performing the market in which they are invested anyway.
The reasons for the average under-performance in both investment styles is that passive managers charge fees and have costs which erode the “indexed” result generated by the market. Active managers have even higher costs and tend to have winning and losing investment positions which average down to below the “indexed” result. Some commentators have even observed that the managers who do out-perform their underlying market were probably just lucky in having a few more winners than losers that particular year. Examples of the same active investment managers out-performing consistently year after year are rare.
Direct investment in residential property is different in many ways and on many levels. But there is still a distinction to be made between the two approaches.
An active property investor is a speculator. Someone who typically has a relatively short time horizon and a desire to make money fast. The risks are high. The timing is critical. These are the renovators, developers, flippers, bargain-hunter and DIY, hands-on types who roam open houses every weekend and, if my experience is any guide, are the ones who know the least about the macro or big picture issues at work in the market. They are subjective and often don’t really see the wood for the trees. They devour the daily real estate media, watch all the renovation shows on television and think last weekends auction results are a good market indicator.
A passive property investor is an accumulator. Someone who sees long-term growth exceeding inflation and leverages that growth to increase their equity and therefore net worth over time by growing a portfolio of property. The risks are lower. The timing is still important but not as critical. These people tend to be objective, patient and busy. Objective because they see the property market cycle from a medium to long-term perspective. Patient because they know there is no such thing as a fast buck without commensurate risk. Busy because they have active careers and families and little desire to spend their free time chasing short-term speculative profits.
These two approaches to property are very different animals. They can be taxed differently and they carry vastly different levels of risk. I suppose it’s obvious which of these I advocate as the strategy that stands the test of time. It’s just that almost all the people I meet who have tripped up in property (some in devastating ways) have fitted the active profile.
I am a passive property investor. I do not buy old properties to renovate. I do not develop property (but if I did, I wouldn’t call it investment). I do not read the daily real estate press (unless I’m in it). I think auction results are close to useless information. I have a life apart from my investments with free time to pursue my passions. My investment properties grow in value because I understand the market mechanisms at work and focus on accumulating a portfolio of income producing properties bought at the right price, in the right place at the right time to hold at minimal ongoing cost for long-term capital appreciation.
Which kind are you?
An ongoing collection of thoughts, opinions, observations and recommendations by long time property analyst and commentator Brett Johnson.