Misunderstanding what makes a good property investment – #2 of the top 7 Critical Mistakes (Ep.32)

Give me one dollar and I’ll give you 35 cents back. Doesn’t sound like a great deal does it? In fact, it sounds like you’ve been cheated.

Yet property spruikers will point to tax deductions as a reason to invest. In their property. That they are trying to sell you. Which they make a margin on. At your expense.

The ability to claim a tax deduction is certainly a benefit, but it should never be the primary reason for investing.

And it definitely does NOT mean that the property you are purchasing is a quality investment.

In episode 32, we discuss “Misunderstanding what makes a good property investment” – #2 of the top 7 Critical Mistakes.

Listen as David Johnston, Cate Bakos and Peter Koulizos take you through examples of the wrong reasons behind why some people invest in property.

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Show notes

  • Firstly, understand your goals – once you have a good grasp of what you want to achieve, this will determine what you buy, when you buy and where you buy. For example, if you want to make some quick money on a renovation, purchasing a townhouse built in 2015 is not for you.  
  • Bad reasons to invest: 
    • “My friends are doing it” – this is not the right motivation to take on debt and risk. Get clear on the ‘why’ before you make any moves.  
    • Saving tax – give me one dollar and here is 35c in return. Did that make you feel good? No. The property needs to have strong growth to justify taking this hit. Tax deductions are a benefit, no doubt, however it should never be your primary reason to invest.  
    • Buying a property that is easy to keep an eye on – in other words, something in your neighbourhood. Which is all well and good if your location has some strong capital growth. But if your neck of the woods has languished, you are putting all of your eggs in a not-so-great basket.  
    • We’ll buy for future use, we may be able to move into it. No one knows what the future will hold, why don’t you purchase a quality investment and make yourself some money while you’re still deciding what you want? 
    • Buying something for the kids – if you cannot see into your future, the view looking into your children’s future is even more murky. Unfortunately many parents fall into the trap of purchasing apartments which their kids may use while they’re at uni. But then what happens when they are ready to move out? Settle down? Or maybe if you’ve jumped the gun, they don’t actually want to go to uni at all. To top it off, there is no growth in brand new apartments, so you’ve just lost out.  
    • Buying where you will retire: eg by the beach. This is not a great move, particularly if retirement is not in the near future. You will most likely be making a cash flow loss because the property will only be rented for 6 to 10 months out of the year and you’re getting bad capital growth because you’re so far away from the city. Better purchase a quality investment and make some good money while you’re still working, then use that to purchase an even better home for retirement. Or have a few extra dollars up your sleeve.  
    • Having a project to keep you busy while you’re bored. Doing a renovation is not a ‘hobby’. Be prepared to get stuck into some serious work with some serious risk.  
    • I bought it because it was cheap – we’ve spoken about this before. If you buy a cheap bag of rotten apples, you’re still left with rotten apples.  
  • Steer clear of brand-new properties and ‘off the plan’ 
    • This is a great way to overpay for a dud. Developers artificially inflate values  which are recorded as the sale price and they are great at withholding other pertinent information. They do this by selling the property at full price, but then offering a cash-back rebate. The result? Everyone thinks the apartment is worth $550,000 because that is on the contract of sale but the new owner only paid $500,000 for it.   
    • Don’t forget that you are also paying for the developers overheads, cost of labour and pocketed profit as well.  
    • If you buy in a building with over 20 dwellings and the dominant portion of owners are investors, there will be a race to the bottom to get a tenant. Your high rental yield is suddenly looking a lot lower. The tenants are happy though. They use the lift, the swimming pool, spa, sauna and gym – all of which you pay for.  
    • Then after a few years, the building starts to date – maintenance costs go up, did someone say scaffolding? Before you know it, the owner’s corp is asking you to fork out some more of your money. What happened to that positive cash flow? 
    • The biggest hit of all is that your property is actually going backwards in value. Because it has a low land to asset ratio, it’s depreciating. Check out the resources to listen to our episode # 16 “unpacking land to asset ratio” 
  • Other traps:  
    • Rental yield – a paradox. The greater the rental yield, means the weaker the capital capital growth. If a property is being sold to you as a high percentage yeild, take note, this means it won’t be doing you any favours for long-term value. Paradoxically, if you have a property with high capital growth, the rental return often grows faster. Even though the percentage return is lower.  Properties with high rental yields are often cheaper and more affordable to purchase, which is how people get stuck in this trap.  
    • Hey, don’t change the numbers! Property is subjective, and although looking at history can give us a good indication of future growth, it is not perfect and never will be.  
    • Beware of the median – data can tell you any story that you want it to tell you. So, take all data with a grain of salt and listen to our episode # in the resources. 
    • Land is king! This is a great philosophy but it does not relate to size. It relates to value. Just because a property out in the sticks is on 700 square mtres, does not make it a good investment.  

Peter Koulizos– The Property Professor’s Golden nugget: firstly, figure out why you are buying. This will determine what you buy, when you buy and where you buy. A good investment for one person is not necessarily a good investment for you. 

Cate Bakos- The Property Buyer’s Golden nugget: if you google property mistakes, you’ll be subjected to reading things that spruikers put out there and you don’t have a way to measure the authenticity of the advice. Find long-term property investor that you trust and admire, have a chat to them about how their assets have performed, what they believe has caused the better performance and how they would contrast that with risk and cost of ownership. The key is how long they have been in the market and the return they’ve made.  

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