Buying property vs Making money

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September 25, 2013
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November 6, 2013

Buying property vs Making money

Making Money

Australia has a problem!

Too many Australians believe that to be a successful property investor they can just buy any property and it will appreciate in value. This misconception is the main reason why most property investors only have one property in their portfolio. The story goes like this; Mr & Mrs Investor visits their local banker or home loan broker, they arrange pre-approval on a loan and then start looking for a property. Their criteria for buying property is generally a combination of 1) how they feel about a specific property or location, and 2) convenience.

This is why we see 80% of DIY investors;

  • Buy something new from a marketing brochure off the plan in the capital city where they live,
  • and/or, buy a property from within the suburb where they live or a suburb that they feel good about – also within their home capital city.

The result is, more often than not, a negatively geared property with limited rental and price growth potential in the short term.

With all the hype around negative gearing, novice property investors don’t understand this key point: making an annual loss on a property is only a good strategy if the property is rising in value.

Let me ask you – how do you choose which shares to invest in? Is it based on how you feel about the company? Do you need to be able to live near or drive past the offices of the company? It may come as a shock to some people but I think it’s important to make clear that property, like shares, can and does go down in value. I believe there is a false sense of security out there that property is as “safe as houses” and the timing of the investment, the price you pay, and the sort of property you buy is not that important because “the property market always goes up”.

The reality is, property values don’t go up every year. Here are some grounding examples;

  • If you had purchased in Brisbane in 2007 most of you would have lost money as prices in a number of quality suburbs are still not back to 2007 levels – 6 years no growth.
  • If you had purchased on the Gold Coast in 2008 – almost all of you would have lost money as prices are still down between 30% and 50%.
  • If you had purchased in Sydney in 2004 most of you wouldn’t have made any money until 2009, which is 5 or 6 years without any capital gain.
  • If you had purchased in Melbourne in 1989 most of you wouldn’t have seen any growth for 6 or 7 years until 1996 when properties started to rise in value again.

These are not isolated incidents. In fact over the last 2 decades every capital city and major regional town has experienced extended periods of price stagnation. Some of you might be thinking to yourselves, (and I hear this all the time) “I am in it for the long term so it doesn’t really matter if prices fall or go sideways”.

Let me ask you this – would you invest $500,000 into one single company stock because you saw a picture in the newspaper or someone working for the company knocked on your door? Especially when all the key pieces of information indicated that the share price would go sideways or backwards over the next 3 to 4 years?

If your answer is no, then why is investing in property any different?

Successful property investors know that in order to continue to build wealth in an effective manner; short term price and rental growth is king. The secret of property investing is buying property is not the goal – making money in a stable and low-risk environment is the goal.

Successful property investors think about the property market on a national level – not the street in their suburb or the suburbs within their capital city – but all suburbs in the country. Yes it becomes more complicated, but becoming a successful investor and picking the right suburb & properties is not going to be easy.

Some of us have experienced exceptional growth over recent years either pre or post-GFC, so much so that we could be forgiven for thinking that there’s little need for advice, but don’t let good fortune fool you. The last two decades has seen standard variable interest rates fall from 17% down to below 5%, allowing property values to rise in line with the falling cost of debt. The next decade will be characterised by a rising cost of debt, producing headwinds for any price rises.

Unlike the share market where you can buy $10,000 or $20,000 of shares in stages as you follow a trend, property is purchased in multiples of $100,000. Therefore, having to invest $500,000 in one transaction makes timing the trend one of the most important factors in the short term success of the asset.

At the moment there are 20 of the top 25 property markets going through price stagnation periods.  Given what you’ve just read, where are you choosing to invest and why? Will that location and/or property allow you to continue to build your portfolio, or will you be stuck in a asset that is burning cash and not growing in value?