The mrd “set ‘n’ forget” for busy people ™ system exactly reflects my investment strategy. Let me explain why I only invest in (median priced and permanently tenanted) residential property.

As you would expect, from time to time I am asked why my investment focus is so narrow; i.e. only property, only residential and only median priced. The answer is very simple…

Safe, secure, predictable and reliable are the characteristics found in a “set ‘n’ forget” for busy people ™ investment and the Industrial, Commercial, Retail, Holiday, Student and Retirement property sectors are significantly more speculative. There are very few people who do not live in a residential property and regardless of what may be going on in any particular sectors of the economy; we all need a roof over our head.

As evidenced by the willingness of banks to lend so heavily against its value, residential real estate is absolutely considered the most stable asset class. Even with the recent U.S. led credit crisis, it is still possible to secure a 100% loan to purchase residential bricks & mortar.

Industrial, Commercial and Retail Property

These property types bear many similarities.  Essentially, they all house (i.e. are the home of) businesses and other commercial enterprises.  Their fortunes are tied to the success of the economy, rather than our need for “shelter”. It can be argued that these types of property investment offer better returns than those of residential; however, in risk adjusted terms this is not the case.

While businesses will sign up to longer term tenancies and will usually cover all outgoings; such as body corporate and rates… should a property owner be confronted with an extended vacancy; and this can easily result at the end of a tenancy agreement or if a business goes broke, the domino effect to an investor could be “terminal”. Remember, your tenancy agreement is only as strong as your tenant’s business.

A friend of an mrd colleague invested into a converted service station. The tenant was a well run tyre fitting business.  Until that business outgrew the premises everything went well; but when the tyre fitting business vacated and moved to larger premises he was forced to absorb all costs personally. His cash reserves were sucked into his investment property and he was pushed close to financial breaking point.  Fortunately before he ‘went to the wall’ he did secure another tenancy; albeit with lesser terms and lesser rent.  He survived that fight and hopefully his next vacancy will not inflict on him the same sort of pain.

Holiday Let Property

Again, holiday let property is subject to economic factors.  During peak seasons they will often deliver a healthy cashflow; however, expect income to drop off significantly during any off season.  Inconsistent and unreliable cashflow are not the hallmarks of “set ‘n’ forget” .

With residential property I can easily appoint a new property manager should I have concerns with whomever may hold the management rights currently. With holiday let properties I am pretty well stuck with the resident managers regardless of their fees, their ability to market my unit or their performance generally. Again, not “set ‘n’ forget” ™.

Retirement Villages

Units in retirement villages are being promoted as the high demand property of the future.  While there may be a demand for these, they are not reflective of where people would generally choose to live.  Values are not set by people falling in love with them or with where they are located as much as the commercial need to live there.  Many retirement village residents live in these places because of a lack of viable alternative.

Rental income from these properties is tied to pension rates and inflation and the future value of such an investment is likewise tied to the commercial return. Therefore, a (retirement unit) will appreciate only in line with inflation and any increases in the pension; regardless of any boom in the residential property sector.

Again as it is with holiday let accommodation, you will be at the mercy of the management team.  Imagine trying to move the management rights away from the resident managers to an outside firm – good luck, you’re going to need it!

Yes we have an aging population and yes demand may be steadily increasing for this type of accommodation, however, why would I limit an investment decision to a property that will only ever meet the housing needs of a very small sector of the overall population? Again, not “set ‘n’ forget” ™.

Capital Growth

The value of all non-permanently let, residential property types will be forever tied (restricted and/or limited) to the properties rental yield.  Nobody falls in love with a factory, paying a premium price higher than they ought… because they ‘love the garden’ or the ‘close proximity to schools’ etc. No, values are always determined purely on commercial realities.

Measuring Risk

Banks are in the business of risk management. Their lending policies reflect how they rate the risk of competing property investment types. Subject to individually assessing an applicant, they will often lend 100% LVR (Loan to Value Ratio) against your home. This is definitely not the case with all non-residential property types. Banks are generally reluctant to lend above 70% for a commercial property purchase.

WHY? Simply because when things get tough in the economy (notice I said when, not if) many businesses will falter. In all economic cycles; especially the tougher ones, businesses fail. Default rates affect a banks bottom line, which in turn hurt their share value. They know that when it comes to residential… even in the tough times, people need a roof over their head. It is also true that the majority of us will fight and do whatever we have to in order to prevent a bank taking our homes.

Measuring Opportunity Cost

Investing in some sort of non-residential property inflicts upon us another cost; opportunity cost. You see, being able to only borrow 70% LVR means I have to fund the other 30% (plus settlement costs) as opposed to an 80%, 90%, 95% or even a 100% lend.

Let’s assume that you invest in some form of commercial property and as such receive a better rental return than you may have had you invested in residential. Is this better rental yield on one commercial property going to deliver you more or less (future) wealth than 2, 3 or even 4 residential properties would have? If you only have to find small deposits of 5% to 10% (as an example) you will be able to secure and settle your 2nd, 3rd and 4th property that much sooner. You don’t have to be very smart or very good at maths to understand that if the power of leverage leads to wealth, then a greater level of leverage will equal a greater level of financial success!

I defy anyone to attempt to convince me that using minimal deposits (or equity) to invest in well located, permanently let, residential property, where land supply is limited and housing demand is increasing (exponentially) is not be a smarter, more profitable strategy than any investment that requires me to find a 30% cash (or equity) deposit. Again, not “set ‘n’ forget” ™.

Compounding interest is said to be the “8th Wonder of the World” and compounding the opportunities offered by a responsible investment strategy that requires the least input from us should not be (but unfortunately all too often is) underestimated. To miss this opportunity by investing in property that requires bigger deposits is probably the #1 reason why I only invest in residential.

Clear your head, block out the noise and let the dust settle. Why we invest has everything to do with more choices, sooner. I often say to people… “It’s all about ROYE”. ROYE is an acronym for the name of proprietary software we use to demonstrate how it is possible, in less than 10 years, for you to be in a position to be able to Retire On Your Equity. You may never need to, but how comforting is it to know that regardless of what else may happen… your retirement is funded? This is why I invest. It is why I seek knowledge so that the tough times (such as we have just lived through) don’t rock me or take me off course. My reasons and goals for investing are clear… I set out to build equity and wealth as quickly (and with as little risk and bother) as possible.  I discovered a system that would allow me to invest and sleep at night; regardless! I call it the mrd “set ‘n’ forget” for busy people ™ system and I’m ready to share my knowledge and experience with you… but only when you are ready to hear.

At mrd we are professional, yet friendly. I passionately believe that we do what we do better than any other, yet we are boutique. We do “this stuff” ourselves. We have the knowledge, the software and of course the runs on the board. We will teach you, mentor you and support you… that is, when you are ready to make a buying decision… because we will never “sell” to you.

Why not ‘test us’ by asking your question or requesting we prepare a ROYE analysis for you; you may be (pleasantly) shocked at how you’re treated – click here.

Happy Investing,

Nick Lockhart