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When it comes to getting a return on property, people can make some unforgiving errors. One such error is selecting an asset that underperforms relative to the market, remember there are hundreds of factors that can compromise the future investment potential of a property causing it to underperform. Another error is ‘poor timing’ of the purchase relative to personal future circumstances, usually we only realise these ‘poor timing’ errors in hindsight, and people often apportion blame for their misfortune on fluctuations in the market. Mostly, it boils down to ‘poor timing’ when purchasing a property that doesn’t suit the needs of the purchaser or alternatively purchasing a property that limits the choices of the buyer in the short term. Allow me to explain further….
Property tends to be the most expensive asset people purchase in their lifetimes. They often borrow to cover the financial requirements on the day of settlement. You have to plan for immediate cash flow needs, this can place limitations on the ability to borrow additional money if and when the situation changes without having to sell the current property.
One of the reasons a ‘poor timing’ error hurt’s the hip pocket, is the high entry costs associated with property (such as stamp duty) which is compounded by the expensive exit costs when selling the asset. In other words it is an expensive process to buy and sell over a short period of time as the property hasn’t been given time to grow in value. Even worse the investment may have been fundamentally compromised anyway.
Imagine the following hypothetical. You purchase an investment property taking on significant debt to do so, shortly thereafter your personal circumstances change and you decide to upgrade your family home. However you quickly realise that since you had to borrow to cover the immediate needs associated with purchasing the investment property, you are now unable to meet your lifestyle and family requirements as well as afford the home upgrades they you are looking at. In this situation most people tend to choose lifestyle over investment opportunities and sell the investment property. This investment is sometimes sold at a loss when ‘all’ costs are factored in, all for the purpose of freeing up burrowing capacity for the family home purchase. This is a prime example of ‘poor timing’ causing a large impact on an investment return.
Another hypothetical example of ‘poor timing’ affecting the return of a property is one where if you were to purchase a home, only to outgrow the property in the short term and decide to trade in for a larger property. This may be due to you realising it is time to put in place the beginnings of a burgeoning family or something else entirely. Once again most people would choose lifestyle over investment and decide to purchase the new home instead of continuing to pay down debt and allowing for property value and salary increases to take place.
These are just two simple examples of how ‘poor timing’ can affect the outcome of the profitability of a property purchase. In each situation the ‘poor timing’ factor has occurred due to a requirement to improve the quality of the roof over your head. The fact that we can change our lifestyle and living choices easily and regularly can impact on the need or choice to sell an asset at a relative loss. Therefore when you are thinking about purchasing any property, try to ‘property plan’ your future 2 years, 5 years and 10 years down the track, envisage if today’s decision might be impacted by future decisions.
No one truly knows what the futures holds – which is one of the great joys and fascinations of life. However at times a little ‘property planning’ can help you to have a clearer path and therefore ensure you do not burn money with poor decisions. Ultimately Property Planning Australia exists to help people make more informed lifestyle choices. Lifestyle choices are enhanced when we ‘property plan’.
We’re happy to sit down with you for a property planning conversation – this is a holistic financial discussion incorporating your property choices. Click here for your complimentary property plan meeting
Written by David Johnston, Director – Property Planning Australia
