THE 20 MILE RULE

Hatched by Justin Clarke+ on Tuesday, December 6, 2011

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Economists that analyse property are a negative bunch at the moment spurting enough doom to make you choke on your Christmas cake.

If you choose to see the cup half empty it probably will be, but more than ever we need to take a good look at how we have prepared ourselves for retirement and the question of which asset class to trust still looms large.

I still challenge the perception held by many that it is not a good time for investing in property. The argument against property often makes a point that property prices are expected to remain flat for a while with very modest capital appreciation which I accept.

I have made arguments over the last 12 months about how good times are now for finding great opportunities in property, and have laboured the view that this is the time that you should be in the market, but there is another very important point. A disciplined property investor will pay little attention to the business cycle and focus more on yield and cash flow than what the ebb and flow of capital in and out of the market.

A few weeks ago I attended a talk by Jim Collins, the influential business management expert with top selling books to his credit like Good to Great and Built to Last, and I was inspired to borrow this story from his new book to share with you.

In December 1911 two teams of explorers pitted against each other on a journey to be the first to reach the South Pole. Both teams were determined to be the first to achieve this audacious goal, but they were vastly different in preparation and strategy.

Firstly, the English explorer, Robert Scott decided to take advantage of good weather to drive his team to the maximum to cover the most distance they could in a day (sometimes covering 45 miles on a good day) so they could rest and recover when bad weather would make the journey impossible. Scott had new untested equipment and ideas which he predicted would give him the edge and was confident that he would be the first to plant his flag at the pole.

Norwegian explorer Roald Amundsen on the other hand, paced his team to cover only a set distance every day regardless of weather conditions, covering no more than 20 miles a day. He learned from living with the Eskimos what equipment, food and clothing worked in sub minus conditions, and planned carefully to cover only a short distance every day to prevent his team from suffering from fatigue. So they kept moving slowly with skis, dogs and sleds, able to make progress even in the worst of conditions. On the evening of 12 December, after years of planning and more than 650 miles of journey through torturous conditions, Amundsen found himself only 45 miles from the pole. The weather was clear and he had no idea of Scott’s whereabouts, but instead of pushing through to the pole he covered only 17 miles and set up camp once again, refusing to be tempted or influenced by conditions to change his strategy.

Amundsen eventually got to the pole first and returned back to base with his team intact. Scott, on the other hand perished with his entire team, found eventually only a few miles from the safety of camp.

Jim Collins refers to this strategy in as the 20 mile rule and his research shows that companies that grow consistently perform better in the long run than those that adjust their plan according to market conditions. But in real estate investment this rule is even more relevant.

Think back over the last 7 years and remember how many unprepared adventurers dived into residential property investment and bought up houses in a frenzy while the conditions were bullish. At one stage in 2007 one in every four properties sold was bought for investment purposes and this fuelled an oversupply of housing especially in the mid-priced market. Off plan offerings were snapped up by investors with no plan other than to flip on to a willing buyer who would hopefully be prepared to pay more for the property on completion. The result was catastrophic for many who would have been significantly better off if they had a long term plan and stuck to it religiously. I am sure you know investors like Scott who perished in the financial crisis that followed.

Most people buy property as a pension plan to replace their income when they retire, and this is where property investment is a winner.

But apply the 20 mile rule.

Look at the end goal and decide how much free cash flow you will need to live off at that future date. Calculate the value of the debt free property you will need to own to generate that income at that future date and work back to see what you will have to acquire to make that happen. Work on yield or cash flow.

There is no wrong answer as long as you end up with a plan and you stick to it religiously, regardless of what the markets are doing.



Categories: Property Investment, Property News

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