Common Mistakes of Investing in Properties

I spoke to someone this evening about investing in London. I explain the various zones, the up and coming developments, the demand and supply situation, cashflow from various properties. I also drew up the future plans of London and point out opportunities. As an investor, we do not care very much about the emotional satisfaction of owning a "trophy apartment", or where we invest (although safety and the ability to collect rent are important factors). We only care about capital gains and cashflow (rental yield), so total returns are very important.

To my shock. At the end of our discussion, she said that she will invest in Knightsbridge. That's where rental yields are a shocking 2 - 3% (it was 8 - 9% 20 years ago!) and prices at record highs! There's a fundamental investment principle: "buy low and sell high". Never follow a well beaten path. Knightsbridge has no pretty views (unless you live near Hyde Park and can shell out over GBP2m!), no future developments (no new tube station, Cross Rail, shopping mall or major areas of employment). All it has are snooty, old-moneyed people, Russians, rich Asians as neighbours. It has wonderful shopping I must admit. But nothing more. If something costs GBP1 million and offers a rental of GBP70k per year in 2002, but today the value is GBP2 million and offers a rental of GBP80k, would you invest? It means that a bubble has formed.

One may argue that Knightsbridge may continue to rise by, say 3 - 5% per annum, because rental must eventually catch up with prices. However, if I carefully choose another location which has future potential, the capital gains could be 10 - 20% per annum, because rentals are 6 - 7%! That's how I'm going to catch up with the rest in terms of wealth! That's how I intend to double my networth in 3 years and thereafter double it every 4 years!

Another person whom I've not spoken to for a long time suddenly called me to ask if I was willing to take over a downpayment that he paid for a trophy home in Melbourne. He bought it through a property exhibition (something I've always warned against), never visited Melbourne, let alone seen the location of the place. He doesn't even know if the price he paid for is fair because he has no comparables! Worse, he doesn't know what cashflow he is likely to generate from his investment. He bought it at the spur of a moment because the agent was a sweet talker. Of course my answer was a "NO"! Thankfully, the loss of reception of my mobile while in a lift saved me from this awkward conversation.