What inspired me from Lizzie's article published in your Property Update newsletter (7^th September 2007) was her blunt admittance of her mistakes in property investment.  For it is from our mistakes that we learn the most. If we manage any success at all in life it is from our previous errors.

Now, if we are clever enough to learn from other people's mistakes that's really smart. So here is my 2 cents contribution. And yes, of course, I've got a few things right along the way, like subscribing to this newsletter, arguably the best in Australia! I think I made three important mistakes, but the last one is unpardonable. Just read on.

I started in property as a reluctant investor when we moved from Campbelltown NSW to the Blue Mountains. As a family, we decided we needed a change and the beauty and community aspects of this area attracted us strongly. We looked for the best school we could find and that happened to be in Leura, so we rented a house close to the village and local school. Without realising at the time, we were actually making choices that any smart investor would try to trace. Thanks to our tenant in the house we left behind in Campbelltown, we made our first brilliant property investment ever. Once we realised that it was the Mountains where we wanted to live we decided, as most people do, to sell in Campbelltown and buy in Leura.

So we put our house up for sale without realising the fierce hostility that our beloved tenant would display to perspective buyers. Bottom line, the house was unsellable. That was at a time Sydney was booming in 1997 and the property wave started to spread to Western Sydney. So we took the frightening step of borrowing against the equity in our Campbelltown house to see what we could do. As we couldn't buy in Leura, because the boom had started to be felt in this township, we bought a bit further away in Mount Victoria in 1999. We were contributing to spreading the boom without even know that we were doing so.

Then sometime in 2000 the magic moment came and I asked myself; Hey, what happens if I buy property and don't ever sell?? Believe me, that was like asking what happened before the Big Bang! I just didn't have a clue, honestly. So I said, well, someone must have found out already. I went to a book store and found a strange book by the name of"Building Wealth through Property Investment" by J. Somers. What?? Isn't wealth just about saving Super and paying off the mortgage? All of a sudden I entered the property "Lolly shop" I couldn't make up my mind on what to choose.

To cut a long story short, perhaps we haven't done so well since our God sent tenant in Campbelltown, but now we have 10 properties. One is a construction project that should settle next week for another house in Cairns and there is also an off the plan to settle in Jan 2009 in Manly, Sydney. Of the established properties, we have four in the Blue Mountains, one unit in Neutral Bay, Sydney and another unit in Southport, Gold Cost. We still have a unit in Buenos Aires that notably has appreciated at about 8% per annum despite hyperinflation, a currency collapse and virtually no banking system for loans. This one is also the result of another 'accident', but that's another story…

During these years the investments and development I did in Queensland went really well and helped us to counterbalance the mistakes I describe below. How I made strong capital gains and robust cash flow is yet another story, perhaps a bit boring to tell here.

Now, what everyone is waiting for…the MISTAKES !!

Mistake #1: In reality several mistakes are packed into this one. We sold our house in Campbelltown and bought a cottage in Blackheath, Blue Mountains. Luckily we remained in the property and didn't do anything more silly than that. The reasons behind the move were: It was hard to manage the Campbelltown property so far away, plus this was a very big house that in the future would be hard to rent due to diminishing household formation rates. The cottage was three bedrooms so it would be easier to rent. Plus the Blue Mountains had better future growth prospects according to Residex. ALL WRONG.

1) Managing properties at a distance is not a problem at all. You just need a good managing agent.

2) More bedrooms = more rent. There will always be large families more than willing to rent a big house due to the general scarcity of large houses. So, this is not a reason to change.

3) We paid too much for the cottage and got too little for the house in Campbelltown. We were poor negotiators in this one. Plus selling/buying attracts about 10% on the value of the property sold.

4) Residex reports are great, but they are not Gods with a crystal ball as they state in their disclaimers. They were predicting a huge increase in property values at the time we did this clever transaction and I was mesmerized with this really big Lolly in the Lolly Shop. I didn't realise the market in NSW was turning around thanks to the Bob Carr legacy that was taking its toll in terms ofmigration patterns.

All in all, doing nothing would have been the best strategy by far.

Mistake #2: This was in reality a consequence of the previous mistake. We ended up with too many properties in the Blue Mountains. That's not good in terms of diversification. Plus I was again mesmerized with the 2004 Residex predictive report that showed very strong growth in this area for years to come. None of this eventuated…this is not Residex's fault, they just use predictive models that sometimes are spot on, whilst others are not. We are all human. The fault was all mine by misleading myself and not looking into other things as well, like simply observing population trends clearly running away from NSW after the property boom that lasted to about 2004.

So what I was meant to do? Repeat Mistake #1? History proves that in bad times it's better not to sell property. So now I'm avoiding the easy temptation of selling and starting a development in Melbourne for instance (we have enough in Queensland by now). I'd rather wait until capital growth inevitably eventuates and use that equity; then proceed with Melbourne with the help of Metropole. I could have done better than just waiting, but that's life. We better bite the bullet, understand the mistake and move on.

Mistake #3: This was the worst by far. It was 2005 and we were considering using the increased equity we had from our four properties in the Blue Mountains. Should I buy into a Perth development land that I saw selling for $100K and build a house or start this very tempting option trading strategy? I can imagine readers recoiling in horror as this story unfolds….

You may recall that in one of their recent newsletters, Michael (Yardney) mentioned that the most common mistake property investors make is drifting away from property because at times it can be boring and predictable. I can assure you that I am testimony to that, I must confess.

I was always attracted by the financial markets with their myriad of derivative products. What I didn't know was how draining the huge swings of volatility can be. Selling naked option calls on Crude Oil when Katrina was about to strike the US coast is not for property investors I have to say, or for the ordinary individual for that matter. Even though I made a tidy profit on these ones, I lost a lot more on others that didn't go that well.

Again, to cut a very long story short, thanks to the diversification strategies I learnt, I managed to lose only 60% of the invested capital. Not too bad considering that some people lost about 150% on some trades. And that was while guided by an expert who knew all about this at a very respectable fee.

Let's rub some salt into the wound. What would have happened if I just bought another boring house + land package in Perth as I was thinking before?

Avoiding Mistake #4: What's the purpose of just identifying mistakes if we don't do anything with them? As I said before, we learn more from our mistakes than anything else. So how did I apply what I learnt in the context of our latest property acquisition?

As many of you must be doing now, I've been having a close look at the Sydney market as buying opportunities start to emerge, especially in blue chip suburbs. My question was how to take advantage of this emerging market with minimum exposure and risk? I thought that a good purchase off the plan could provide me with this, but a lot of research was needed, as this can be a scary purchase. Buying off the plan is no different than buying a Future on Crude Oil, for a fee you have the privilege of taking a risk. If your bet is right you can make a lot of money, if it's wrong…. Well, you just need to go to Mistake #3.

The difference is that in this case the off the plan was a strategy, a tool if you wish, for a long term acquisition and not a short term speculation. With this goal, I set sail in search for the best off the plan purchase I could find and safely afford the risk. My sailing took me to the Manly coast in Sydney where I found a new low rise development that was at the centre of a beautiful beach. It was in its embryonic stage, the DA was yet to be approved by council, no glossy brochures yet, settlement in 18 months and the reputable developer was searching for some sales that they could show to the bank to obtain finance. Of course, no one told me most of this, I had to find out.

So I joined efforts with a good friend of mine who is also a property investor, with the experience in off the plans that I lacked. We had a good look at the development and did plenty of research to ensure the asking price was reasonable. Then, of course, we asked for 10% discount with a 5% deposit and got it for that price; not before some protracted negotiations with the developers. If it was too easy I would have been suspicious. You really need to feel you are facing resistance from the seller to know you are in the 'right' zone.

I employed a savvy solicitor who had done many of these purchases and with his help, managed to get the fine print right to avoid any unpleasant surprises. Things like the level of finish, body corporate structure, internal size of the unit once completed, connection between underground car park and unit, etc. I also made sure that if worse came to worse, I wouldn't lose more than the 5% deposit I placed on this property. This an advantage over future trading, where you usually need to 'hedge' the risk by buying some call options, in other words, another expense.

I regard the 10% discount not as profit but as insurance. If things go pear shaped by the time it settles, I have a certain level of room to sell and exit for the contract price. If things go reasonable well, which seems to be the case at the time of writing, this property should settle for about 15% above the purchase price. In this case I would almost have the deposit inbuilt into the settlement price, a purchase with virtually no money down. That would be nice, but I won't hold my breath. Can you imagine holding your breath for 18 months!?

This was search number four. The previous three didn't gain approval from my most stringent auditor: my wife. She doesn't have a great deal of interest in property, so she keeps me in check. What she has is an almost infallible gut feeling. If the thing doesn't feel right for her I know I just don't need to bother. Needless to say, she didn't approve much of my dabbling in option trading.

Yes, I used the Residex reports. I insist they are the best reports around. The difference is that now these reports are part of the strategy and not THE strategy.

I finally went ahead with this one by default. I couldn't find anything wrong with it, actually most of the people I spoke about were quite enthusiastic about the idea; but no one else apart from my friend took action and committed.

In the newsletter of 07-Sep there is a very interesting article on the potential pitfalls of buying off the plan. I think that the article boils down to "It depends how much discount you get for the risk you are taking" and I think I meet this criteria.

I don't have a crystal ball to know for sure if this will be a good decision or not. Time will tell. What I'm confident of is that I did all the research I could to satisfy myself that I have a reasonable exit strategy if things go wrong. And, yes, there might also be a handsome capital gain if things go well.

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