Three things you need to know about property investing
In last month's column I wrote about the rise of technology and how it is changing the way that investors access information, and how these changes do not necessarily lead to better decision-making. This month I would like to continue this theme by exploring some of the common assumptions that many beginner investors make that run counter to my own experience over the past two decades.
Myth 1. Houses grow in value faster than Units
I find this widely held belief most perplexing, because as a generalization it simply is not true. A well located, well researched property should give good returns regardless of the dwelling type. Equally, a dwelling in a poor location will perform poorly, regardless of whether it is a house or a unit. My property portfolio is made up of 10% houses and 90% units and townhouses. My top ten performers in terms of growth and yield are ALL units.
Myth 2. Only buy in areas with a proven record of growth
Most beginner investors want to "see it before they believe it". They are happy to buy in areas that have been doing well in the recent past, but much less convinced about areas that have not performed well over the same time period. But growth is not linear - areas that have experienced robust growth will eventually come off the boil, and underperforming areas will come good if the drivers for growth materialise. My Sydney purchases in 2008 and 2014 have done extremely well, but I'm not recommending Sydney in 2017, as I can't see the value.
Myth 3. The cheaper the property, the less expensive it will be to own
This is another "furphy". Cheap properties are often in low demand areas, otherwise they would be more expensive! This will have an impact on capital growth potential. It is likely to be an older property too, attracting less rent, more maintenance, and little or no tax relief. Many investors seem to equate a lower purchase price with lower risk, but my experience has been that if I focus on value rather than price, I can get a better quality build in a better area with much better growth potential AND better cash flow. So the more expensive property can be much less risky than the cheaper one.
Making good investment decisions is all about having the right amount of the right information, and an open mind. Less experienced investors sometimes subscribe to the "more is better" theory and collect masses of information to the point where "analysis paralysis" sets in and they are unable to make a decision. They also often have pre-conceived ideas about what type of property or area will give them the best result. My actual experience of investing over the past 20 odd years suggests that some of these ideas are plain wrong. So what advice can I give to potential investors who are serious about wealth creation? Firstly, start at the beginning. For true wealth creators property is the vehicle, not the goal. There are lots of ways that you can use it to create wealth, so decide on your strategy first. This will help cut down on information overload. Secondly, for any given area profile your target tenant first, research them extensively, then buy the investment property that will suit their needs. Adhering to these guidelines should help you avoid expensive mistakes and help you to get richer faster.
NEED HELP WITH YOUR PORTFOLIO? Ian is passionate about helping others realise their goals through investing in property, and can be contacted at Ph. 1300 850 038