Solving The Three Biggest Property Investment Mistakes With Affordable Housing (1)
Despite the high stakes, property investors continue to make three costly errors that affect decision-making, stifle their ability to build a portfolio and kill cash flow - but they’re easily avoided. By steering clear of forming emotional attachments to properties, shunning property hot spots and rejecting negative gearing, it’s possible to alter your strategy, improve cash flow and build community. Making the change to our own portfolio didn’t come lightly and it was only after years of investment mistakes pushed us to the limits that we knew there must be a better way. It’s through this realisation we turned towards affordable housing - but more of that to come. First, let’s look at the three biggest property investment mistakes and what causes investors to make them time and time again.
1. Developing an emotional attachment to their investments
When most people consider buying an investment property they make an emotional decision based on whether they love it and whether they’d like to live there. This is exactly what every agent hopes for - ideally they’re seeking two or three prospective buyers who become attached to the same property and force the price upwards. Emotion is why auctions work so well when people get carried away and keep bidding even when the price surpasses their budget. An emotional attachment means you’ll almost certainly lose your common sense, forego due diligence and pay above the odds, then when the time is right, you’ll struggle to let go. All can be costly mistakes.
2. Following the herd to the ‘hot spots’
Being tempted to buy after hearing people talking up a ‘property hot spot’ and seeing marketers with their glossy brochures means you’ve probably arrived too late and in the wrong place. Despite how great a deal may seem - new property! hot spot location! locked-in rental! - it’s hard to be fully aware of the massive risk you’re about to take. The developer may have subsidised the rental for that first year, which means once that time is up you need to find your own tenant, often discovering the going rate is significantly lower. Left with a cash flow problem, you decide to sell but find buyers have abandoned the market.
3. Negative Gearing to save tax
Like millions of others, I was taught that negative gearing was part and parcel of property investing, but at what cost? When your investment’s rent doesn’t cover mortgage payments, strata fees and other running costs, shortfalls come from personal savings and you receive an income tax deduction due to cash flow loss. This is fine if you can meet additional cash flow needs until rents rise to meet the costs, but what happens when you buy in a hot market and there’s no growth for 10 years? Forget about the tax you might save – if the property is costing you money and eating into your income then it’s keeping you in a job rather than liberating you.
A better approach through affordable housing
I’m all for building wealth but when strategies create constant stress, the price is too high. It’s safer to make decisions based on proven long-term performance with the intention of generating long term capital growth through properties that are cash flow neutral or positive. Affordable housing employs multiple strategies to add value (by at least threefold or more in some situations), reconfiguring floorpans and opening dwellings up to more residents. This involves taking the standard 4 bedroom house and increasing its capacity in a modern version of the old boarding house format, or building smaller dwellings from the outset. You’ll then be implementing a niche investment strategy that supplies housing to the singles and couples that make up 60-80% of our population.
Affordable housing doesn’t rely on negative gearing, buying in a hotspot or being emotional about the actual property. Property is simply a business decision however, with the implementation of the strategies in our portfolio, we can also see people benefit through being provided with clean, safe and affordable housing. In our office we work towards bringing back the genuine connection of community by providing elegant housing diversification. This didn’t happen by chance, it involved many mistakes and pushing through many fears to come to a point where not only do we benefit from investing in affordable housing but also benefit the community in a very positive way. As we say “It needs to make sense before it makes dollars!”