​​The Wealth Power of Property
by Fred & Brett Johnson
ISBN 0646316354

The Wealth Power of Property was written 20 years ago by Fred & Brett Johnson.

​Markets have certainly changed since that time - but the principles of successful property investment have not.

​The Wealth Power of Property became essential reading for investors seeking to understand counter-cyclical property investment with this 240 page ground-breaking book exploring issues never before published in Australia.

​The Wealth Power of Property

Brett Johnson periodically reviews and updates selected excerpts from The Wealth Power of Property bringing tried and true principles up to date with current markets and conditions.

This is essential reading for property investors navigating the complexities of residential property investment in the new millennium.

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Access revised excerpts here (click to view):

Chapter 4: A simple philosophy (Revised 2017)

Brett comments: "On the 20 year anniversary of TWPOP I thought it appropriate to revisit the underlying philosophy we have advocated for decades. Turns out not much has changed."

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WHY DO SOME INVESTORS FAIL?

Many people acknowledge that real estate, especially residential, is the best and safest investment of all. Why is it then that some appear to continually prosper from residential property investments and others fail to capitalise?

Your authors have never failed to make a capital gain from residential property acquired for investment purposes in over sixty years of investment. There has to be a system, or philosophy to follow that underlines those who continually make money from property.

Those who have owned their own homes have many stories to relate about their fluctuating fortunes. It is not unusual to hear of a home owner who purchased their home and sold it within a few years and doubled their money. Others tell of bitter experience, where, compelled to sell, they have been unable to realise their original cost, or worse, were unable to sell for an amount sufficient to pay out their mortgage.
After economic recessions the media tend to feature stories of families in difficult circumstances due to soft property markets and rising interest rates. Some of the circumstances disclosed in these stories are tragic. Perhaps some of them are unavoidable. Some will get into difficulties no matter what the economy is doing. Many are preventable.

The same applies to property investors. First time or inexperienced investors may find the need to sell, either because they have over committed or other economic circumstances in their personal situation caused a change of plans or financial difficulty.

If the market happens to be weak at the time they may find the property hard to sell at a price that will recover their capital. They may also have to recover capital outlay over and above the original purchase price including losses incurred by negative gearing.

AVOIDING NEGATIVE GEARING PITFALLS

In other chapters of this book, negative gearing is discussed in more detail. The advantages are many, but there are down sides. How can these pitfalls be avoided or at least minimised?

At social functions the subject of discussion among guests often turns to property. Typically when property markets are strong someone will relate their story of good fortune in property only to be outdone by the next story teller. Alternatively, during poor property markets each will outdo the other with stories of doom and gloom.

Probably because we are known as commentators and authors with a strong interest in property, the topic at parties we attend seems to turn to property more frequently than most other subjects.

On one such occasion, a party guest told of buying a home in Sydney for a purchase price of $540,000. She told how she added a swimming pool as well as other improvements for a further cost of $80,000 increasing her total capital cost to $620,000. "I've had it on the market for the past twelve months" she related "and I can't even get an offer", "Don't talk to me about property" she continued "Property has to be the worst investment of all".

She could not be convinced otherwise, even though our experiences have been quite the opposite. Is it experience that counts, inside information maybe, being at the right place at the right time, knowing someone in the right place or "in the know?". Is it luck? All of those elements can certainly help, but those who continue to make money in real estate seem to achieve success constantly. So is there a formula or philosophy?

The answers is 'yes', and it is a simple one.

THE BUYING DECISION

When property values start to rise it generally follows an increase in rents. To those locked into the rental market, rising rents, at least for a period of time, become a way of life. This has a two-fold effect.

Home buyers see the sense in acting before values rise further as the cost of servicing a loan falls below the cost of renting. This is despite the challenges of having sufficient deposit and the current debate raging about millennial hipster brunches. (We will post a news story on that delicate subject soon).

At the same time, investors are attracted to rental property purchase for the higher income yields caused by rising rents and relatively static values.

It is a double whammy. Increased demand from both investors and home buyers at pretty much the same time. As the market grows in value more buyers are attracted and the market moves into a stronger growth phase.

During a period of slow or static growth, the direct opposite occurs. Buyer demand slows, investors retreat and the market stalls.
It follows that the market moves from oversupply to under supply as demand ebbs and flows. When the market is moving up in value many feel compelled to enter the market, either to maximise their purchasing power before further growth, or to participate in the anticipated growth from escalating values.

In other chapters we show you how these values have moved over specific time periods in which buying property has been opportune and times when it is not.

When our party friend who complained about the poor performance of her investment was asked the timing of her purchase, we realised that she had purchased the home in 1989 and was trying to sell it throughout 1995.

By referring to the Sydney House Price chart, you will easily discern that 1989 was the peak of the property boom of the late 80's and 1995 was a period of oversupply of Sydney property with rising interest rates and static values.

She had bought at the top of the boom and was trying the sell in a slump. How could she possibly expect to achieve maximum results?

DON’T FOLLOW THE LEADER

What we have demonstrated in this chapter is the "herd mentality" that is often talked about in investment circles. Large numbers of people buying when the market is rising, and selling when it is falling. It is what most people do. If they did not, there would be no boom and no bust.

So you can see how simple it is. By running counter to the herd instinct and doing the complete opposite, buying when the market is down and selling when it is up, the risk of loss is substantially reduced.

Refer back to the Sydney House Price Chart. If our party friend had purchased in 1984 and sold in 1989 the result would have been completely different. Still a five year holding period but five years earlier. Based on the Sydney median house price her gain would have been 18.18% per annum compound instead of 1.66% per annum compound. A massive difference.

She purchased when she should have been selling, and was selling when she should have been purchasing. That does not make a lot of sense. There is however, one more safeguard to be added. If you buy when the market is down and never sell, one more element of risk is eliminated.

A great deal of growth can be built into property at the time of purchase by correct timing, and of course, astute buying.

If you never sell, you do not realise a loss during a subsequent downturn, and the property can be held for the next upturn which will eventually occur.

Always buy and never sell is a maxim we have lived by, and it does ensure the slow and successful accumulation of a substantial property estate.

Buying and selling residential property for personal occupation is a more selective situation than buying for investment. It is not always possible to time the sale of owner occupied property to economic or property market circumstances. Transfers, loss of employment, health or marital problems push such control out of reach for many. The need to upgrade or downsize may influence timing. When we deal with our homes it is not a purely financial decision. But for investment property timing is more manageable.

Buying and selling in favourable markets is a reasonable objective. Even with owner occupied property one can make an argument for reasonable timing at both ends of the process however investment property demands good timing.

THE THREE MOST IMPORTANT ELEMENTS

Location, location, location has been repeatedly offered by some experts as the three most important factors in property selection. We think it is an oversimplification.
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Whilst not denying the importance of location, it certainly is not the only important criteria. We would prefer to list the three most important elements as timing, financing and location. And close on the heels of those are time (not the same as timing), information and patience. We discuss these qualities in other chapters.

​Let us for now establish that the simplest and most important rule of real estate property purchase, is to buy when others sell, and sell when others buy. That is the area of opportunity. That is counter-cyclical property investment.
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Chapter 10: Capital growth - the No. 1 consideration (revised 2017)

Over the years we have seen many misconceptions about investing in property.

THE MOST COMMON MISCONCEPTIONS

The most common misconceptions about property investment, and these leave all others behind by a country mile, would be firstly, that you need to have a high income or large amount of cash to invest in property. We have already seen in earlier chapters that this is simply not the case and even more so in recent times with interest rates at lifetime lows.

The second is, the higher the rental income the better the investment prospects of the property. This notion would have to be one of the deepest potholes on the road to property wealth.

Another one, and this is a personal favourite, is where some people confuse the desirability of a property with its likely future performance. By that we mean the propensity to believe that an upscale, aesthetically pleasing, exotically located, vogue decored property will outperform its more average counterpart because its desirability means more people want it, which will in turn drive its rental and capital value. 

All these notions could not be further from the truth.

It is understandable though. Typically, people looking to invest in property without the wisdom of their own or somebody else's personal experience do not have much to go on. Even in this day and age sources of reliable property investment information are actually few and far between. Most of the information out there is actually targeting home buyers not investors.

Consequently in such an information vacuum, it is natural enough to rely heavily on whatever information may be available, however scant it may be. The danger is that this can lead to over-emphasising the relevance or importance of some of this information.

THE MOST ASKED QUESTION

One of these regards the rental return. Probably the most common question asked of real estate agents by investors is "how much rent could we get for this property?"

A fair enough question, and one of the pieces of information we need to know to assess the merits of a particular property. Almost as important of course are the expenses that we pay out of the rent we receive. The problem is it is all too easy to get caught up in the gross rent (before expenses) or net rent (after expenses) equation, either in judging the investment merit of the property or as a comparison to other properties.

The reason this can be problematic is that it distracts us from the reason most people are investing in the first place - to build wealth or net worth through the increasing value of our property investments - capital growth.

Certainly this is true for anybody that substantially borrows to purchase property, especially if negatively geared.

SUBSIDISING THE COST

Someone who borrows enough of the purchase price of the property that the after tax annual cost of holding the property is a negative amount, is negatively geared. This means they are subsidising the ongoing cost. It is costing them money, usually a relatively low amount but, nevertheless it is a cost.

Therefore, if we are subsidising the cost of the investment there has to be a reward. That reward is the capital growth over time.

It matters less how much rent we receive, if our primary reward is the growth in value. The difference between high and modest rent will not have a dramatic effect on the ongoing holding cost, whereas the difference between strong and ordinary growth will have a massive effect on our result over time.

It must follow that growth is the number one consideration in the whole property investment equation.

In fact there is a correlation between rent and growth which further underlines the point. At least in general terms, it is usually the case that the higher the rental or income yield, the lower the growth expectation and vice versa.

For example, if rental income were the most important consideration, we would all go to an old, run down, out of favour part of town and buy small industrial units were we could get the highest possible rental yield. In Sydney this may be a 8 - 12 % rental return. But would we achieve the capital growth, for that matter would we in fact find or consistently keep a tenant?

If we did not expect the growth to occur then it simply would not serve to achieve our objective of building wealth.

A similar and related issue is the modern day popularity of "negative gearing" as an end in itself. Many organisations and even some media commentators promote the benefits of negative gearing as if nothing else matters.

As we have already discussed, if the investment is costing us money, no matter how small that amount might be, it is still a cost. We do it for the capital growth. As wonderful as the taxation advantages can be (even with 2017 Federal budget changes) in helping to keep the cost of holding property to very low levels, no amount of tax advantage can in itself build wealth. Only the capital growth over time can help us achieve that.

Besides the risk of overestimating the value of a high rental, or getting carried away on the negative gearing bandwagon, the overwhelming dominance of capital growth as the number one consideration in building wealth through property investment is paramount.

If you are NOT convinced that capital growth is going to occur in the future, do not negatively gear and possibly do not invest in property at all.