The false economy of bargains and DIY
Everyone loves a bargain, but when it comes to investing in real estate, penny pinching on the purchase price and professional services can often be more problematic than profitable.
Who doesn’t love a good bargain? Prices slashed! Fifty per cent off sales! End of financial year savings! That sense of satisfaction that comes with knowing you’ve scored yourself a cracking deal!
Did you really? Or did you just buy the merchandise they couldn’t move, pay what the item was actually worth rather than the inflated asking price, or worse, land yourself a lemon?
That balloon of satisfaction quickly deflates when you realise that deal wasn’t all it was cracked up to be.
In my experience, genuine bargains are few and far between and when it comes to investing in residential real estate, penny pinching doesn’t pay.
Let’s start with that house you’ve been eyeing off that on the surface, seems like a steal. Sure, it needs a bit of work but with a lick of paint and some TLC it could make you a motza, right?
Not so fast. Sometimes all you’re really buying is someone else’s problem that could drain your cash flow and after all the outlays on maintenance and repairs, ultimately won’t make you any money.
Renovations need careful consideration too and will almost always cost more than you initially planned to spend.
And just because you spend money on a property, it doesn’t mean it will add value or that you’ll even get your money back.
While some do manage to come out ahead, most people who renovate don’t make money after you factor in holding costs and tax.
The impact of professional services on your financial returns is another aspect of real estate investment that should never be underestimated.
A good property manager, for example, is worth their weight in gold. Property managers will charge between six and nine per cent of the rent for their services.
The difference of three per cent on $500 per week rent is $15 per week, and even less if you’re negatively geared.
I’ve seen many people lose much more than that due to property managers undercharging rent, installing dodgy tenants, failing to conduct routine inspections, the list goes on - not to mention the stress!
That doesn’t necessarily mean that those who charge more in property management fees will always provide better service.
It’s true that some people have had bad experiences with property managers who charge higher rates but I’ve never come across a good one that undercharges.
I suggest you do your research, read the reviews and seek out recommendations from trusted sources.
The same theory applies to accountants. A few years back we were approached by an excellent accountant who owned property themselves.
They asked if they could undertake an audit of 100 of our clients to see if they were maximising their tax returns, offering not to charge where they couldn’t add any value.
They ended up partnering with a great quantity surveyor and getting our clients hundreds of thousands of dollars in tax refunds!
If you’re a property investor, it’s a wise move to have your tax returns lodged by an accountant who knows - and owns - property. They’ll be a little more expensive than the cookie cutter accountants but pay you back many times over.
Finally, there’s the DIY investor who does it all themselves. While it’s true some people get it right when it comes to selecting properties that will grow in value and allow them to build a portfolio, I’m sorry to say that most people don’t.
Ten per cent of Australians own an investment property, one in 100 own three and one in 1,000 own four or more investment properties.
These numbers have hardly changed over the past few decades, despite the Australian median house price growing from $170,000 to $825,000 between 1997 and 2021.
It’s a false economy to try to do it all yourself. Save yourself thousands of dollars and countless hours of wasted time by having a mentor to guide you.
That could be a family member or friend who has experience in property investment and runs on the board or, failing that, a professional.
A good professional with a proven track record will make you 10 to 20 times the amount you pay them for their advice along the way.