I opened up the Hobart Mercury Property Guide recently and sat down to
enjoy a luxuriating read only to be struck down moments later with a sense of
irate anger.
I usually enjoy reading the “property expert” pieces in various news
publications. As a real estate business owner (www.elephantproperty.com.au) and
avid property investor I figure you can never be exposed to too much
information about your passion or your career.
Only the article I read about the “golden rule of investing in property”
printed on the inside of the cover was shameful. This article (pictured) was written by Andrew Winter
@andrewtwinter “FOXTEL TV's Selling Houses Australia - Presenter and Property
Expert. NewsLtd Property Writer”. It’s my opinion that articles like this are
part of the reason that people buy investment properties without doing enough
research and that is what limits a lot of people to just one investment
property. Anecdotal figures told to me say more than 80% of investors stop at one
property. If I look at my history in real estate (almost 20 years) the stats on
the investors I’ve dealt with over the years would back that up.
Now shameful is a
pretty strong word – so let’s drill down on what I found so abhorrent. Firstly
– Winter states that your golden rule in real estate should be don’t buy the
home unless the rent equates to at least 1 per cent of the purchase price – an
example he gives is $400 per week rent on a $400,000 purchase. Now simple maths
aside (1% of $400,000 is $4,000 not $400) I don’t disagree with this as a
general guiding principal to START with.
But then Winter goes
on to say that “at $425 - $450 per week you should be very excited and buy the
property immediately. Even higher? Well, book the holiday to Europe.” Utter
nonsense. He does state that it’s a “rough guide”, but to advocate going out
and buying a property “immediately” when it’s showing a return of less than 6%
without even mentioning other factors such as buying costs, vacancy rates in
the area, maintenance, property management costs and the borrower’s repayment
abilities is what gets people in over their heads and leads to them making
uniformed decisions.
The crux of the lunacy
in this article for me was when Winter described himself as “old-fashioned” and
wanting investments with a “positive cash flow”. You know what– me too! Only I want it to be an actual
positive cash flow. Let’s take a
property that Winter would is recommending we, the reader, buy immediately -
one returning $425 per week on a $400,000 purchase.
Let’s look at an
absolute best-case scenario:
· - Annual rent would be $22,100 (not taking into
consideration any time for vacancy – which of course isn’t that realistic).
· - Let’s say you manage it yourself (I wouldn’t
recommend it – but hey, I’m a real estate agent) so you’ve got no management
fees – but you’re going to have council rates, water, land tax - $3,500 at a bare
minimum (probably more.)
· - Let’s say you have the only investment property
in the world that requires no maintenance (again, completely unlikely – but
we’re looking at a best case scenario) – but you’re likely going to have smoke
alarm compliance costs and other unavoidable expenses – let’s do a very
conservative $500 estimate.
· - Say you got a 4.5% loan, you’re on interest
repayments only and you had 20% cash deposit as well as being able to fund all
your initial costs such as stamp duty, conveyancing, building inspections etc.
You’re going to be outlaying $18,000 on interest (not to mention other
associated banking costs).
And this super
property that you should buy immediately – how positively geared is it given
all the above near impossible “best case” scenarios? It’s earning you the
princely sum of $100 per year. Now sure – you’ll likely have some depreciation
benefits to consider in there based on what type of property you purchase – but
more likely than not, you’ll also have costs to engage a professional property
manager (who will likely more than earn their fee), you’ll have maintenance
issues that pop up (yes, even in a brand new property), you’ll borrow more than
80% and shock horror – that property might sit vacant a few days every now and
then. That $100 isn’t going to go too far. You could look towards capital
growth – something all investors desire, but it’s not cash flow.
Now – I don’t want to
sound like a negative nancy. I love property investment. It is one of my true
passions in life. But it isn’t a board game of monopoly. It takes actual
understanding of the concepts at play. Mess it up and you won’t lose a tiny red
plastic hotel – you could lose anything from a lot of sleep to a lot of your
financial freedom or more.
Want to start
investing in property? Here are my tips:
Whether the property
you buy is negatively or positively geared – look for all the areas in which
it’s potentially going to cost you money. Work out a worst case scenario
(including one where your personal circumstances change – unexpected baby, loss
of job, illness) and consider all the potential expenses.
Speak to a successful,
real world investor. If my experience in real estate has taught me anything
it’s that you probably already know one. It could be your builder, the school
teacher down the road or your uncle. Do not only talk to people who have had
one crack at investing, had a bad run and given it up.
And finally - don’t
rely on “golden rules” presented by “experts”. Do your own research, work out
your financial goals and what works for you. And if you really, really want an
expert – I’d recommend Jan Somers (check out any of her books in your library
or at any good bookstore).