With an overload of information about property investing available, it can be difficult for budding investors to separate fact from fiction. Some lessons we learn on-the-job, when we make mistakes and learn from our experiences. These lessons are hard won but not easily forgotten!
However, if you can avoid making the mistakes in the first place, you’ll also sidestep a lot of heartache and possibly financial loss, which can potentially bring your investment dreams to a grinding halt.
With statistics revealing that around 50% of first-time investors sell up within the first 5 years, and 90% of the remaining investors never getting past their second property, you should be doing all you can to minimise risk and trip-ups that cause you to stumble.
So today I’d like to dispel a few myths to help point you in the right direction.
Only properties surrounding a CBD will gain significant capital value
Properties around cities aren’t the only ones to grow in value, nor are they ever absolutely guaranteed to do so.
Finding a property with good growth potential comes down to location, demand for the area, rising population figures, demographics of those living in the area, infrastructure and future plans, and local supply and demand ratios
If you only look within a few kilometers of the city, you might be missing some excellent opportunities elsewhere.
It’s better to buy a new property than an old one
Yes, there are benefits to buying a new property: high depreciation deductions, no renovation work needed, lower costs for repairs and maintenance since everything is brand new…
But that doesn’t mean they’re always the best option.
Often you pay a premium for a new property and if it’s part of a large complex, it will lack scarcity and have many other similar properties hitting the market simultaneously causing you to drop your asking rent.
Unfortunately today many new properties are built poorly (I often jokingly say out of papier-mâché) and with poor floor plans.
I’d rather buy a solidly built, but tired, older apartment with the ability to add value through renovations. That way I can “manufacture” capital growth, increase my rental return and depreciation allowances.
The property market rises in 7-10 year cycles
While the property market clearly moves in cycles, firstly there is not one property market (meaning different submarkets run their own cycles) and then cycles tend to vary in time – they don’t necessarily last seven years.
I know some investors are told that real estate is safe investment because property prices will always rise. But there are no guarantees – just look what’s happened to property values in the mining towns!
Whether or not your assets will increase significantly in value depends entirely on your property, its location and its individual attributes.
Fact is: not all properties are created equal.
If you have bought a property in a location with multiple growth drivers, and in particular a spot with the right demographics wanting to live in that location region and push-up property values, then the fluctuations of the market shouldn’t worry you.
It’s the land that increases in value so houses make better investments
Again… Not all land is created equal.
There are millions of hectares of land in Australia that will not rise in value because nobody wants to live there.
With economic growth, jobs growth, wages growth and therefore population growth occurring closer to our CBD’s, apartments in the inner and middle ring suburbs of our capital cities are likely to increase in value more than houses surrounded by a suburban block of land in the outer suburbs.
I would rather own a 10th of a block of land (my proportion) under a block of apartments in the inner suburbs of our big cities than a large block of land way out in the sticks.
Land size in and of itself does not dictate future growth.
Long-term success involves a diverse investment portfolio
It makes sense to diversify your investments – doesn’t it?
Well NO – not really.
I know most financial planners and many books recommend, “Diversify, diversify, diversify.”
Yet I’ve found most successful investors, business people and entrepreneurs don’t diversify. They specialise – they find one thing they’re good at and do it over and over again.
Warren Buffet, the world’s richest investor, says, “Diversification is protection against ignorance. It makes little sense for those who know what they are doing.”
Robert Kyosaki explains that his rich dad asked, “Who’s ignorance are you being protected from? Yours… or your financial advisor’s?”
He then goes on to say:
One of the keys to being successful at anything is to know what you are doing. When you know what you are doing, you make more money because you buy only great investments… not a basket of wishful thinking.
The fundamental concept behind a successful property investment journey is finding the right kinds of properties (at the right price. Whether you’re new to investing or you’ve purchased several assets already, it’s never too late to hone your skills and learn a few new lessons.
The property market is a fickle mistress, so make sure you’re keeping yourself educated and staying staying current with its movements and trends.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its 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 Update blog.