API Blog :: Have your say!

It’s a well known fact that a large number of property investors never achieve the financial freedom they desire and with the changing markets we’re experiencing as we move into 2011, I’m concerned many investors are heading down a path of certain property losses.

BY MICHAEL YARDNEY

I’ve noticed a worrying trend where some investors are so keen to do something – in fact to do anything – that they’re heading for property investment disaster.

I’ve come across many potential investors who feel they’ve missed out on the property boom that occurred over the last year or two and want to catch up.

Others feel they’re being priced out and are desperate to get a foothold in the rising property market. And there are those who find they are unable to obtain more finance and seem willing to try almost anything to participate in the current property boom.

So today I’d like to share with you what I consider three surefire ways to lose money in property and one way to ensure you invest successfully. What it boils down to is that in their bid to get into the property market, many investors are starting to speculate rather than invest.

1. Off the plan purchases

Sure it sounds enticing….buy at today’s price – settle or onsell in a few years and you’ll make a profit. But does it work?

Currently one of the big issues with buying off the plan is finance – the finance an investor needs to eventually complete his purchase.

Since most loan approvals are only current for three months, obtaining a formal pre-approval for an off-the-plan purchase is impossible.

The problem is we currently have six big banks in Australia and they each have a policy restricting their exposure to not lending to more than 15 per cent in any one building. This means that if there are 100 apartments in the building, and you’re the 16th person to approach the bank, when the building is completed they may decline your loan application. But when you start running to the next bank, they’ve probably already filled their allocation also.

So some investors who buy off the plan will have to sell because they can’t get finance. Add to this the fact that there will also be some off-the-plan purchasers who always intended to onsell the property when the building is complete and you have a whole lot of apartments up for sale when the building is finished.

Is this a problem? Well it is if you have desperate vendors who lower their prices to sell at whatever the market offers.

And even if you are able to settle, the banks will only lend you a percentage of the new lower valuation on your property, which will be the lowest sale price achieved by one of the desperate vendors, rather than the price you contracted for.

Add to this the fact that banks often only lend on a 70 per cent loan to value ratio and what looked like a good investment to start with starts to turn sour.

Apart from the fact that there are too many inner city apartments on the drawing board, I would also avoid off-the-plan purchases due to uncertainty about completion dates, the level of finishes and the market conditions when you eventually take possession. You need to buy your property at a significant discount to make up for these unknowns. But currently, developers have to sell their products to you at a premium to make the projects work financially.

2. House and land packages

I know some investors buy house and land packages because they’ve heard that land appreciates in value and they feel they’re getting a big block of land for their money. But when you think about it, usually the land accounts for less than half the selling price, giving these properties a very low land-to-asset ratio.

Others are considering buying in these new estates on the mistaken belief that as properties are cheaper there, they’ll be more affordable to the masses as property values keep rising. This is wrong because these are exactly the types of areas that suffer most when interest rates rise. Residents in these areas tend to have less disposable income than people who live in more affluent suburbs.

3. Options

A third surefire way to lose money in property over the next few years is to follow some of the creative schemes currently being promoted by property spruikers.

People with little or no money are happy to hear the promoter’s suggestion that you can control millions of dollars worth of property using none of your own money.

There’s nothing new about these schemes. And if history repeats itself the promoters of today will become very rich while their students will learn a very expensive lesson.

If these methods don’t work, what does?

There is one proven, time-tested method that has made average Australians very wealthy. However, it’s nowhere near as sexy as some of the smoke and mirror techniques I’ve just mentioned.

If you want to grow your own significant property portfolio, you need to own properties that provide wealth-producing rates of returns. This means buying a property below its intrinsic value, in an area that outperforms the average over the long term and one to which you can add value so you can create some capital growth. This could be through renovations, refurbishment or redevelopment.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. Subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.