David Johnston wrote this article for Domain on July 4, 2019 and it was also published in The Age and The Sydney Morning Herald.
Property is a unique asset class, particularly considering the amount of money outlaid on costs other than the asset itself each time a property is traded.
This means that mistakes on your property journey can be terribly expensive and carry long-lasting effects on your future wealth. If you start your investment journey without considering your goals for many years into the future, the chances of taking a few wrong turns along the way are significantly increased.
The perils of short-term thinking
Take Anna and Chris* as an example. This couple chose to rentvest rather than buy a home.
Rentvesting has increased in popularity over the past few years, with many property purchasers preferring to rent where they live and buy an investment property elsewhere.
Anna and Chris rentvested because they could not afford to buy a home where they wanted to live and were encouraged by a buyer’s agent and mortgage broker to purchase an investment property interstate.
Rentvesting allowed them to maintain their lifestyle, while still putting their money to use. Sounds great, doesn’t it?
However, Anna and Chris didn’t plan ahead. In fact, they thought their rentvesting choice would just be for two years, and assumed they would be able to purchase a home by that time.
Unfortunately, things didn’t pan out as they would have hoped. The investment didn’t perform as well as the buyer’s agent and mortgage broker suggested, and the city they purchased in under performed compared with their home city.
The timing of their purchase in the market cycle and competition from lots of similar new properties in the area further compounded the situation.
In hindsight, they have acknowledged that, had they better understood the long-term considerations, they may have waited and continued renting, or purchased an investment in their home city so they would at least be more likely to keep pace with its cycle.
Lack of planning limits options
Many property buyers underestimate the time it will take to purchase a subsequent property following the one they have just bought or plan to buy. Without proper analysis and forward planning, this error can be very costly.
People who have made this decision without the benefit of foresight often find themselves needing to sell the investment property earlier than they expected, limiting the capital growth benefits due to the short timeframe of ownership while also incurring expensive transaction costs.
Alternatively, they are stuck renting for years longer until they are in a position to buy a home to live in.
In the worst cases, they cannot even sell the property, because it will not provide enough financial firepower to enable the home purchase and therefore end up completely stuck.
In Anna and Chris’ scenario, their property was on the market for some time, causing stress, and was going to sell at a loss. Ultimately they decided the lesser of the two evils was to hold it for now.
In these situations, would-be buyers are often left in limbo relying on variables outside of their control such as the property market picking up or lenders increasing borrowing capacities.
Or else they find themselves having to save for a lot longer, cut back on lifestyle, or increase working hours to grow their income.
An inability to make decisions is one of the major causes of stress in our lives so no one wants to be in this position.
It has been four years since Anna and Chris’ initial purchase, and it now looks like they will need to wait as long as five to 10 years before they can purchase a home.
Start with the end in mind
With anything in life, if you know where you want to end up, it is simpler to map a path to reach your destination.
You wouldn’t go for a jog without a planned destination, yet people often take a short-term cavalier approach with major financial decisions and do not set a planned destination.
For most people, retirement or the “flexibility” stage of life is the end goal. We call it the flexibility stage because more and more people are choosing to wind back their employment, rather than stop altogether.
For first-time buyers, a more realistic time frame may be to plan and model out five or 10 years ahead.
Someone planning through to the flexibility stage should consider when they would like to start transitioning into retirement or scaling back employment, and what they would like their income to be at this point. Once you have these figures clear in your mind, the planning process is simpler.
The reality is that most people need only two to five quality properties to retire comfortably.
This includes your family home, which is the unsung hero of your investment journey because it is often our largest investment and is capital gains tax-free if it is our principal place of residence.
When it becomes time to downsize, selling your family home will provide you with access to more funds for your retirement – if you have chosen wisely. There are even tax incentives now to top up your superannuation if you fit certain criteria.
Rentvesting may be the right decision for you but all property decisions you make should be made with your eyes wide open.
The implications of each property decision we make are wide-ranging and long-lasting, which is why starting with a long-term view and working backwards is so critical to your success.
*Names have been changed.
Why short-term investing has long-term consequences was first published on Domain on July 4, 2019 and it was also published in The Age and The Sydney Morning Herald.