The Minefield of Property Investing
Property investing. Many people do it, or should I say, attempt to do it, and when it all gets too hard they give up and some even have a story to tell of an unpleasant experience.
I heard an interesting story from a client this morning, comparing a work colleague’s experience of property investing, to his own.
He commented that his friend was looking at an off-the-plan property investment in Melbourne, an area that has just come off a boom and is quite flat at the moment. Even though his friend believed she understood the property cycle, she still went ahead with the OTP purchase as the salesman was quite convincing.
Before we are too judgmental on this purchase, I must say that there are no wrong decisions, just ones that maybe could have been better with a little guidance and education!
A few quick facts on this deal:
- Tarneit in the Western suburbs of Melbourne,
- Off-the-plan purchase in February 2012.
- Purchase price $380,000, expected rent $320 per week.
- Time to completion approx 6 to 8 months.
Questions that really need considering regarding this particular off-the-plan-purchase are:-
1) Where will Melbourne, specifically Tarneit be in the property cycle in 6 to 8 months time? Going up? Flat? Down?
2) What is the supply & demand in Tarneit currently for rentals? Is there an oversupply or under-supply?
If this lady’s strategy is to just buy and hold for 10 years, then this isn’t the end of the world. Having said that, it is quite heavily negatively geared and she will have her equity tied up for many years to come …….. and this is where people can get into trouble.
Investors make impulsive decisions – emotional choices which can end up hurting them financially for years to come; particularly if interest rates go up or the property remains untenanted for periods of time etc.
My belief is that my clients friend, if educated and spent more time doing her due diligence – could have chosen a far better way to use her hundreds of thousands of dollars, instead of waiting a decade for the property market to move – by removing the emotion out of this deal she could be moving significantly faster in her property investment journey.
We have several strategies when investing in property and if choosing an off-the-plan strategy I believe your main aim should be to buy into a growing market – where you use the settlement period to accumulate capital growth. This strategy typically could be mostly beneficial for those who already have a good cashflow in place – to support a blue-chip high growth deal like this.
Snap decisions, emotional choices and unclear plans can cost you years off your life and thousands out of your pocket. Spending time choosing the right team to back you, having a mentor or coach to guide you and nut out a concise property investment plan to suit your goals and bounce ideas off – is essential if wanting to succeed in the minefield of property investing. Remember choosing the right property investment can mean the difference between a little or a LOT of capital growth and the difference between a lifestyle with cash flow to live comfortably, or a stressful life of week-to-week living.
What do you think? I am very interested in your comments and personal experiences. Do you think she has made a poor choice in her off-the-plan investment – and if so why?