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The Big M in Property Investing

In this month’s newsletter, I would like to discuss an invisible but extremely powerful force in our investment activities – the Big M, M stands for momentum.

Momentum is usually defined as the impetus gained by a moving object.

For example, if you start pushing a ball downhill, it accelerates after a few more pushes; we can say the ball has gathered momentum.

In a wider sense, momentum not only can apply to any physical objects, but also on just about anything you can think, feel and observe.

Momentum can also be considered good, bad or neutral. I bet you can easily observe the following in the context of momentum:

  • A brand new car gets a scratch, and you don’t fix it straight away, it will get more scratches faster than other new cars that don’t have any scratches (i.e. scratches can gather momentum☺).
  • Once your desk becomes a bit messy, and you don’t tidy it up immediately, it will get messier very soon (i.e. mess can gather momentum).
  • Once you dislike someone or something, it is very easy to find more things to dislike about them (i.e. disliking can gather momentum).
  • Once you like someone or something, you will find more things to like about them (i.e. liking can gather momentum).
  • Once you decided to marry someone, you will find it very hard to consider marrying anyone else at the same time☺ (i.e. love can gather momentum).
  • Once a person becomes religious about something, he/she will see the world more and more through that religion’s glasses (i.e. faith can gather momentum)
  • Once someone has done the wrong thing by you, if you do not confront that person immediately, they will keep doing more wrong by you (i.e. wrong doings can gather momentum).
  • Once a bank teller steals a few dollars, if no one catches him/her, he/she will steal bigger amounts until he/she is caught (i.e. theft can gather momentum).
  • Once someone lies about you on something small, unless you confront that person immediately, they will keep lying about you (usually behind your back so that you can’t confront them☺) on something bigger (i.e. lie telling can gather momentum).
  • Once you start eating junk food and know it is not good for you, if you do not stop, you will find yourself eating more and more junk food until your body can’t take it any more (i.e. bad diet can gather momentum).
  • You treat others with more and more respect, you will find more and more people respect you (i.e. respect can gather momentum).
  • A child is given the right encouragement and guidance to study at the earlier age; he/she will enjoy learning more and more growing up (i.e. good foundation gathers momentum).
  • You stop wasting money on smaller items; very soon you will find yourself making better money decisions on bigger items (i.e. good money habit gathers momentum).
  • Once you lose money in any kind of investment, if you do not confront the losses (by taking your own responsibility), you seem to lose more and more money in the same kind of investment (i.e. losing money can gather momentum).
  • Once your investment portfolio is negative cash flow, if you do not confront the situation and only hoping it will go away over time, it seems to be just more and more cash flow negative each year (i.e. negative cash flow can gather momentum).

As you can see, after writing a few bullet points here, I am even gathering momentum on producing the list! I have to confront the fact that you don’t have all day to read it before I can stop☺!

Since life is full of momentum in all directions, whether we like it or not, we might as well find out
how to make the most of them. As the power of momentum can not be underestimated; especially some of them can be quite destructive if we don’t stop them earlier.

Let’s use the negative cash flow momentum as an example.

It is widely accepted that when you purchase an investment property (say 9% growth and 5% yield), if you finance it 100%, you are likely to see negative cash flow without relying on tax subsidies.

The benefit of buying such an investment property is that you can usually enjoy a healthy capital gain and tax benefit, so much so that your potential growth can outweigh the cash flow losses.

Whether we like it or not, this is how most investment properties are purchased in Australia, there seems to be very little dispute about it as it is not always practical to purchase investment properties with their yields higher than mortgage interest rates.

If you put such investment property data into an Excel file, you will see how many years later your rent will be greater than your interest repayment, and you will see positive cash flow without tax benefit, just a matter of time.

Unfortunately, this works in theory but not in reality. After working with thousands of property investors over the years, I can attest that most property investors continue to experience negative cash flow regardless of how many years they have been holding onto their investment properties.

In other words, their flawless Excel cash flow projection doesn’t match the reality. Why?

Someone once compares life to a chess game. In a chess game, the player moves the pieces according to the plan. But in life, the pieces can think and not necessarily move according to the plan!

Even if our properties behave according to your Excel projection, but we are the thinking piece in the game! And we may not know that we are being carried by, the invisible but powerful,negative cash flow momentum.

Once you started the negative cash flow momentum, if you didn’t make a conscious effort to stop it or start the positive cash flow momentum, the negative cash flow momentum will take over and run its course, it will carry you along over many years without you realizing it, hence you will find yourself becoming more and more negative every year.

Find it hard to believe?

Go check out 5 of your friends who are residential property investors who have started property investment over 15 years ago with negative cash flow in the first 2 years, and see how many of them are now on positive net cash flow. I bet most of them are surprised to see why they are still negative cash flow when their Excel projection from 15 years ago would have predicted positive cash flow by now.

How could this be possible?

I have seen a lot of property investors started with good saving habits to purchase their home, but as soon as they started negative cash flow from investment properties, their good money habits disappeared over time, and they started spending more money than they earn and eat into their equity, or they simply can’t help to buy more properties for growth at the expense of their cash flow.

If I have to find a logical answer to this strange behavior, I almost have to say people seem to get themselves into bigger trouble so that they can feel better about the smaller ones. Try to solve the problem of negative $2k a month, let’s get ourselves into negative $5k a month, then negative $2k a month is no longer a problem☺! Look, the reason is not important, we can explain the same observation 100 different ways that could make sense to 100 different people, as long as we are aware of its existence and do something about it.

This is the power of the Big M, invisible but powerful. If you just go with the flow (i.e. waiting for your cash flow to turn positive), you are unknowingly being carried by this negative cash flow momentum, doing nothing about it simply means allowing more negative cash flow!

So there seem to be only two ways to stop the negative cash flow momentum:

  • Confront: this is to confront the negative cash flow situation head on with a positive cash flow goal plus a workable action plan to achieve it. This usually requires us to clean up our cash flow mess, which is not always pleasant initially.
  • Walk Away: this is to walk away from property investment entirely to try something different.

I find walking away to usually be a temporary solution. For some strange reason, we seem to always walk right back into something we haven’t confronted in the past. So if I have to choose, I might as well confront it now, as I can always walk away later if it doesn’t work☺!

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Investors Direct Financial Group (IDFG) was established in 2001.
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