Why you shouldn't trust the media when investing in property
There are many commonly held beliefs about property investing that aren’t only questionable but are also utterly false.
Sadly, some investors go through their entire property journey believing them. They’d waste precious time buying the wrong property or using faulty strategy because they listened to bad advice.
Most financial publications and websites shy away from highlighting the potential downsides of investing in property for obvious reasons.
However, if you are serious about investing in property, it’s important to be aware of the following investment truths before you dive in. Or at the very least, as a reality check.
1. Property investing is simple, but not easy
Now this is not a play on words. Just because something is simple to understand doesn’t mean it’s easy to do or make money from it. If property investing is easy, there will be more people owning two or more properties.
But here’s some sobering stats: Half of those who buy a property sell up in the first five years. Of those who stay in the game, 92% never get past their second property.
The latest stats show that there are less than 20,000 Australians with an interest in six or more investment properties. That’s 0.08% of our population!
Of course, property investing is relatively simple if you follow a time tested, proven strategy. The problem is most of us act irrationally and emotionally when it comes to money.
Some of us are too cautious and stay in their comfort zone and invest in their own back yard, while others are in too much a hurry and chase the next hot spot or get rich quick schemes.
2. It can take decades to become financially free through property
Despite what you might have heard, it takes time to become rich through property. It takes two or three cycles to build a substantial asset base, therefore, you need to be prepared to hold your investments for a number of years.
Unfortunately, most investors waste the first 5-10 years buying the wrong investments, then they need to sell them off.
The good news is, with the right strategy, you can speed up the process and achieve your financial freedom sooner.
3. Residential real estate is a high growth, low yield investment – don’t look for cash flow from your real estate
If you’re looking to use property as a cash cow, you may have to rethink your strategy. As a property investor, your job is to build your asset base, not just to get cash flow.
Of course, cash flow is important because it keeps you in the game, but capital growth is what makes you rich and gets you out of your day job.
Growing wealth through property involves going through three stages, namely:
a) Accumulation stage: where you focus on growing your asset base;
b) Transition stage: now you start paying down loans to lower your LVR. If you’ve invested well and your properties have grown in value, this will happen organically as well;
c) Live off your cash machine.
4. The banks are not on your side
I am not saying that your bank isn’t trustworthy but you need to realise that your bank is never going to tell you that the bank across the road has better rates on offer or your borrowing power is better with the lender two streets down!
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5. No one really knows where the property markets are heading
No matter how much data is quoted or analysed, no one can really accurately predict how the property markets will behave in the future.
If you’re counting on your property to grow in value year after year perpetually , you will be sorely disappointed because growth in property values is never linear and there are many factors that are out of your control, no matter how diligent you are.
If you treat your property investments like a business, invest for the long term and ensure you have sufficient buffer to cover rate rises, vacancies, maintenance issues and any other surprises you have a greater chance of riding the property market cycles.
6. There is not one property market
The media tends to talk of the “Australian” property market or “Melbourne” Property market. But the truth is, each state has its own cycle and there are markets within markets – different price points, types of property and geographic locations.
Sure, it’s important to look at the big picture but also consider the micro cycle of the city you’re investing in. This way, you won’t miss great opportunities just because the headline data isn’t impressive.
As you can see, there’s a lot of confusing information about property investing out there, and a pragmatic eye goes a long way in helping you succeed as an investor.
Remember, it’s your money. Be careful what you read and who you listen to.
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This article via Property Update does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.