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Leonard Barnes: Property Power

Discussion in 'Investing Book Reviews' started by Nigel Ward, 11th Jan, 2006.

  1. Nigel Ward

    Nigel Ward Team InvestEd

    10th Jun, 2005
    Property Power - Unleash the potential of the Money Making Machine you call Home

    At just 120 pages (excluding appendices) this is not a big book – but it contains a big idea. Barnes proposes that timing the residential property market (as opposed to time in the market) is not only possible, but produces faster wealth than merely buying and holding. Whilst not disputing the effectiveness of the buy and hold approach, Barnes criticises its slowness and instead describes the strategy he and his wife employed as “buying right and selling right, and early”. As evidence of the effectiveness of the strategy, Barnes notes in the preface that his family’s net worth passed the magic million dollar mark in 1997 through buying and selling 7 properties within 10 years.

    Barnes’ approach is, in one sense, contrarian because it rejects the oft-repeated investment mantra that you can’t predict or time the market. Instead, Barnes argues that the residential property market provides enough warning of both booms and slumps to take advantage of the market’s cyclical nature. Rather than keeping your capital tied up in a property which has already delivered substantial growth, Barnes suggests that lightning rarely strikes in the same place twice, and accordingly, you should sell the strong gainers in your portfolio. The sale proceeds can then be reinvested in another property which has the potential to provide what Barnes calls “Short Term Aggregate Gains” or STAG profits.

    Barnes argues that an additional benefit from turning over one’s property portfolio every 5 years or less is that the maintenance problems which can arise from 20 year old properties can be avoided and better tenants will be attracted. However, Barnes seems to assume that buy and hold investors will never renovate or improve their properties. He also seems to equate old properties with poorly maintained properties. Neither assumption is necessarily true.

    Key Content
    The introductory chapters contain some useful, albeit brief, comments on setting goals. Although I’m rather cynical about Barnes’ focus on the need for a corporate style “vision” and “mission” statement, his thoughts on goal setting are quite insightful. He notes that the often ignored second stage in goal setting involves not only describing in detail how you will achieve your goal, but actually working hard and taking calculated risks to make it happen.

    The bulk of Property Power is comprised of Barnes’ “27 Principles of Property Power”, which he categorises into four stages, namely:
    • planning;
    • acquisition;
    • development or maximising; and
    • divestment or selling.
    Whilst some of the 27 principles are trite property maxims, there are some thought-provoking ideas and observations which deserve further investigation. Barnes’ maps out the theory that not only are there 7-10 year macro cycles, but also seasonal micro cycles which occur every year. Perhaps this is no revelation to those who have instinctively known to sell into the strong spring season.

    Another intriguing principle is to take advantage of the ancient Chinese fortune philosophy of Feng Shui when buying a property or renovating. Whilst this may all sound a bit “alternative” or “mystical”, from Barnes’ description, it seems that at its most basic, Feng Shui is a cross between good design principles and applying common sense to choose properties with good aspect and natural light.

    Although Barnes applied the property power strategy by buying, living in and selling the family home, he notes that the introduction of the 50% general Capital Gains Tax discount (in late 1999) allows the Property Power strategy to be applied to investment properties. Barnes states that this tax reform will allow the strategy “to be undertaken quicker and across a wider portfolio than we were able to do in our time”.

    However, that conclusion is unsupported by any actual examples or even sample figures. Perhaps Barnes’ speculation is forgivable given this book was written in mid-2000 – less than 12 months after the tax changes. In my opinion even with the CGT discount, tax on each investment property sold is a major flaw in applying the Property Power trading approach to any property other than the family home. The imposition of CGT of up to 24.25% tax represents a major inefficiency. At each sale, there will be a leakage of your wealth of up to one-quarter lost to the tax office before even counting any agent’s commission!

    The other major flaw from which Property Power suffers is that it is often quite short on detail. Some chapters introduce interesting concepts but then run for just a page and a half.

    Despite these flaws, Property Power remains a worthwhile addition to any property investors’ library if only for the simple fact that it proposes timing the property market as an additional strategy for the investor to consider. My rating is: 7 out of 10.
    Last edited by a moderator: 8th Apr, 2008