I’ve heard it said that investing in property i s
simple, but it’s not easy.
BY MICHAEL YARDNEY
Now this is not a play on words.
Let’s face it… each year hundreds of thousands of Australians turn to property investment as a way of developing financial freedom, getting more choices in their life or building a retirement nest egg. But very few achieve their goals.
Look at the facts…
About one in four property investors sell their property within the first year and almost half have sold up within five years. Of those who remain in the game, less than 10 per cent own more than two properties.
Most property investors fail
Putting it bluntly, most property investors fail to reach their objective of financial freedom. And my concern is that in the current turbulent economic environment this will only get worse.
The good news is that there’s a way to make property investment work and I’ll explain how, but first let’s look at what not to do.
Currently our property markets are a confusing place, yet property investors are still being bombarded with messages of easy money, which has led to a worrying trend where some investors are so keen to do something – in fact to do anything – that they are heading for property investment disaster.
Even if they don’t have enough money, or haven’t developed the discipline to save, or they’ve already borrowed to their limit, some investors feel they’ve got to do something and in their bid to get into the property market they’re speculating rather than investing.
I understand why they’re keen to share in the profits others have achieved, but sometimes the right thing for an investor to do is nothing.
Here are eight sure-fire ways to lose money in the current property markets:
1. Off-the-plan purchases
Sure it sounds enticing – buy at today’s price then settle or onsell at a profit in a few years time. But does it work?
The problem is when the project is completed some purchasers won’t be able to obtain finance and have to sell. Others, who intended to flip their property for a profit, never planned to settle.
This means that when many projects are completed there’ll be a group of desperate vendors who lower their prices to sell at whatever the market offers.
And even if you are one of those who does settle your purchase, the banks will only lend you against the prevailing market price of your property, which will be the lowest sale price achieved by one of the desperate vendors, rather than the price you paid.
Add to this the fact that banks often only lend on a 70 per cent loan-to-value ratio in many of the big new developments and what initially looked like a good investment starts to turn sour.
Other reasons I would avoid off the plan purchases include the uncertainty of completion dates, the level of finishes and the market conditions when you eventually take possession.
2. House and land packages
Some investors buy new homes because they’ve heard that land appreciates in value. But when you think about it, the land component usually accounts for less than half the purchase price, giving these properties a very low land-to-asset ratio.
While they may be great places to bring up a family, in general new or outer suburbs aren’t good places to invest.
One of the big factors that enhances capital growth is scarcity and that’s something missing in these suburbs.
3. Buy, renovate and sell
I’m all for adding value through renovations but you can’t buy a property, do minimal work and then sell it at a profit, because stamp duty, buying and selling costs, and tax eat away at your profits. On the other hand, buy renovate and hold in the long term is a great investment strategy.
4. Positive cash flow properties
You can’t save your way to wealth with a few dollars a week positive cash flow.
The best way to financial independence through property is to accumulate assets and, in Australia, properties with higher capital growth usually have lower rental returns.
5. Options
Another way to lose money is to follow some of the creative schemes being promoted.
People with little or no money are being tempted by the prospect of bypassing the step of developing the discipline of saving. They’re happy to hear the promoter’s suggestion that you can control millions of dollars worth of property using none of your own money when you buy using an option.
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.
6. Rent guarantees
This is where the developer guarantees a certain rental for a period of time, pandering to inexperienced investors’ concerned about vacancies.
But these guarantees come at a cost – they’re factored into the purchase price.
7. Regional properties
Some regional towns have clearly exhibited better growth than some underperforming suburban areas, but on the whole capital city properties have outperformed in the long term.
Since two important drivers of capital growth include strong population growth and a diverse strong local economy, I only invest in capital cities.
8. Investing in mining towns
Yes I know we’re going through the mother of all resource booms and mining towns will grow in size in the future.
But if history repeats itself, and it usually does, the property market in these towns will be driven by speculative investors. While there will be some short-term booms, property prices in these towns tend to be very volatile.
Well if these methods don’t work, what does?
There is one proven, time-tested method that has made average Australians very wealthy…
If you want to grow your own significant property portfolio, you need to buy a well-located property below its intrinsic value, in an area that outperforms the average over the long term in terms of capital growth and a property to which you can add value so you can manufacture some capital growth.
Then over time borrow against your property’s capital appreciation and grow your portfolio one property at a time.
Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog
