Are you new to the Melbourne property investment market?
Investing in property can be a bit frightening if you are unfamiliar with what it entails. When considering it, realize that properties can generally be categorized into two groups: active or passive investments.
Active investment requires the investors to be on the run, and this could be buying a house, fixing it up and then selling it for a profit. Passive investment, on the other hand, would typically include purchasing apartments or houses to be rental properties and get the ongoing stream of income and growth in the value over time.
Would you like to speak to a Melbourne property investing specialist? Book a discovery session by calling (03) 9998 1940 or email firstname.lastname@example.org
Whichever strategy you are going for, deciding to invest in property can still be intimidating especially when everyone else seems to have plenty of cash to throw around. Even then, it isn’t usually the cash that keeps people from getting started. People are hesitating because of the various ideas frequently thrown around about property investment which are mostly just myths.
In our day to day lives, we hear much chat around people’s perceptions and what it is to invest in property. It’s an exciting industry that offers much potential to a lot of different demographics. The problem is that with such a buzz comes much hot air.
Of course, some of the information you will have heard around investing in property will be true, but at the same time, much of it will be false. The key is knowing what you should believe and, more importantly, what you shouldn’t. To people who don’t have a professional background in property, this can seem like an impenetrable minefield.
Unfortunately, this type of mentality scares off many people from getting involved in the property market in the first place, and the misinformation surrounding it leads others to make crucial mistakes that cost them time and money.
Book a discovery session by calling (03) 9998 1940 or email email@example.com
26 common myths and why they shouldn’t keep you from growing your property portfolio
Myth 1. Everyone’s a Property Investor These Days
There’s been an increase in the amount of Australians investing in property, thanks to several factors (tax incentives, our growing wealth, and that pervasive passion for estate among them). There’s also been a rise in international investment in Australian property, and countless media stories about investor mania.
However, there’s still only a relatively small portion of people that venture into property investment, and fewer even who develop substantial portfolios. People have other priorities, and it does take consistent effort to build wealth through property, which doesn’t appeal to everyone.
2. Investing in Property Is a Get Rich Quick Scheme
While you can make much money from investing in property, it’s by no means something that you should jump into expecting an immediate return. Many people out there try and sell this myth that you can make a fortune in the property overnight to profit from unsuspecting investors. The reality is that it’s all about patience, timing, and knowing the right moves to make.
Property is a substantial investment, and as we explained above, as a financial trend it’s always on the up. The key here is not to expect too much too soon. Wait for the value of your property to rise, and don’t panic if your returns aren’t immediately as high as you had hoped.
Myth 3. You Need to Buy Your Own Home First
This is a massive impediment for prospective property investors. They believe that just because they don’t own their own home, that they can’t begin investing in other properties to make a profit.
This is a property investing myth!
We own 12 properties overall, and yet we rent the home we live in. Why? Because buying a house to live in is taking money out of your pocket that you could be investing elsewhere. When considering your position as an investor, you need to start thinking about things around you as assets, and your own home isn’t an asset because it’s not making you any money.
Start by investing in other properties first; then you’re better placed to generate an income and move onwards from there.
Myth 4. Only the rich can afford to invest
With the growth of property values all across Australia, this myth does appear to be true, but in reality, many individuals with incomes below $100,000 are investing in houses.
An online survey done by LJ Hooker found that of the 1700 households who responded, 37 percent have an income under 100,000 dollars.
Data also showed that 29 percent of those respondents had incomes between $100,000 and $150,000 and 34 percent making more than $150,000 per year.
Just because your property-investor friend has much cash now, it doesn’t mean he or she started that way. Purchasing a house on a full block certainly would cost a lot, but you can start with much smaller investments, such as townhouses, units, and apartments.
When you start earning income from these investments, you’ll have more money to finance others. On top of that, if you pick the right asset at the right location at the right time, the property would appreciate in a few years which translates to more equity to fund your next purchase.
If you are just getting started, you can benefit from the equity in your home. If you have significant equity and have made timely payments, you may be eligible for a loan to build a new house or apartment purchase. Owning another asset may provide a tax advantage, thus extra cash, as well.
Paradoxically, some think only the very wealthy can afford to buy an investment property. While it’s true that you should enter into an investment with a financially responsible lens, some are choosing to purchase an investment property as their first property, and people on ‘ordinary’ incomes are finding they can take a step into investment by leveraging the equity in their existing home, or with savings, they’ve worked hard to put away.
Property investors come in all forms, and not all are wealthy. Although you do need to be in an excellent financial position to take out a home loan, you do not have to be rich. People on average incomes and even first home buyers are finding that they can save and purchase an investment property.
Book a discovery session by calling (03) 9998 1940 or email firstname.lastname@example.org
Myth 5. The banks aren’t approving investment loans
In August, the ABS reported investment housing commitments fell by 1.20%, and the total value of dwelling financing commitments fell 2.1%. So have the banks stopped lending?
What about the reports from earlier in the year that up to 40% of loan applications were being rejected? Is the sky on investment lending falling?
Yes, the financial services royal commission has had an impact on the way the banks are assessing home loan applications. However, in the last six months, we have found while the banks are requesting more information on 57% of applications (compared to 36% last year), the total number of home loans submitted to settled are in line with previous years. In other words, the banks are asking for more information and taking more time to assess, but still approving the right loan applications.
So what is the secret to getting investment loans approved?
Look at other banks
Different lenders have different policies. Where this impacts lenders today is with the banks’ serviceability benchmark rates meaning some banks will assess the loans you hold them at a higher interest rate than those held with another bank.
Put another way, say you have an existing loan of $500,000 with bank A, and you’re looking at applying for a new loan of $250,000. Applying with that same bank will mean they assess your existing loan at 7.25% based on P&I repayments. If that $500,000 loan was held with another bank, and you were applying with Bank A for a new loan of $250,000 they would take the repayments of the $500,000 mortgage at the actual amount being closer to 4% increasing your borrowing capacity.
Principal and interest repayments
What would have been considered insanity a few years ago is now a reality? After APRA’s speed limits put in place last year, investment interest-only loans attract a higher interest rate. Look at principal and interest options; it might work out better for you.
According to Macquarie Bank, “using a 0.5 percentage point [interest rate] differential, Macquarie found that a bank customer in the top tax bracket with a $500,000 loan would be $6,000 better off after five years, and $12,000 better off after ten years switching to P&I.”
Lender, lender, lender
It used to be location, location, location but now its lender, lender, lender.
Another policy we are finding can trip up investors is how rental income on apartments is treated.
Some lenders will reduce rental income by 50% depending on the specific complex (presumably determined by the lenders total exposure to that apartment complex). Ask your mortgage broker to check ahead to make sure you don’t get caught out.
Myth 6. All property goes up in value
Sadly, not so. There are even some ‘experts’ who’ll tell you exactly how much it will go up in value, as an inviolable formula.
Perhaps one of the most commonly heard myths is that property values will always increase. This cannot be more wrong in the Australian Property Market. Land and housing are not immune to downturns, at least not in the short term. When investing, you need to take into account many factors when deciding if it is going to pay off for you. Are you in it for the long haul or are you just trying to flip it?
When you consider a purchase, please take a look at its initial acquisition cost as well as ongoing maintenance costs such as management fees, regular maintenance, and potential upgrading cost.
Then contrast that with possible rental income now, as well as possible future increases. Look at your surroundings to find an indication of rental demand increasing; is there a school nearby? Will there be a potential development in the area?
What kind of lifestyle drivers are there that would push up the value of the property? Taking into account these differing costs and factors, the price may outweigh the possible return on the investment, or it may highlight an excellent potential for growth.
Keep in mind that worrying too much about numbers can also rob you of possible opportunities. While others fret over inflation or unemployment rates, you’ll have less competition and can take advantage of lower buying prices. By thinking creatively, you can ignore any stock market downturn and instead see your long-term real estate values increase.
Over the long haul, real estate is still considered one of the lower risk investments out there. Despite some market correction and periodic drops in value, the property market, in general, does tend to increase over time steadily. It may just take longer sometimes. You also have the assurance that you can make decisions regarding the property.
In a way, you can control its market value with a kitchen upgrade and sometimes even just a fresh paint will the job. In contrast, an investment such as the stock market can be quite volatile, and you have no direct control over it.
Due diligence (absolutely critical as an investor) can offer an indication of how values may change, but historical performance isn’t a measure of future performance. If you stack the odds in your favor there’s the right reason to believe your investment may pay off, but there are many reasons a property may decrease in value, and these risks should be taken into account.
The property market is not always predictable; it can experience both growth spurts as well as intermittent lulls. For example, values across all Australian capital cities rose by just 1.7 percent in the March 2014 quarter compared to 3.8% for the December 2013 quarter and 2.5% for the September 2013 quarter (Australian Bureau of Statistics).
However, remember, past performance is not necessarily an indication of future performance. That is why it is essential to be cautious when purchasing an investment property and be prepared if the market does slump and property values drop.
Myth 7. Houses grow in value faster than units
I find this widely held belief most perplexing because as a generalization it is just simply not right. 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% of homes and 90% units and townhouses. My top ten performers in terms of growth and yield are ALL units.
If you cut through the media noise of over-supply and high-rise fear, you'll soon start to see the numbers for that they are. For example, if you look at Brisbane which is continually being lamented as being in over-supply of apartments, you would assume there are no successful units.
However, if you take a look at some of our clients who purchased at Bastion (a well-researched property in a well-researched location), their rental yields are strong and will surely boost the value of their units.
Some parts of Australia are highly desired, and yes, the price of land is leading to increases in property value.
Remember, however, that not all land is the same. You won’t need to look too hard to find millions of hectares of land in Australia that won’t grow in value.
Because nobody wants to live there!
Desirability plays a massive part in real estate growth. In fact, without it, you won’t see an increase in your property’s value. This is why your property research should be targeted towards those areas where people want to live.
Book a discovery session by calling (03) 9998 1940 or email email@example.com
Myth 8. Renovation Adds Value to Your Property
Many people see buying a property as the first step in their journey as an investor, and that they then need to renovate that property to add value to it. Moreover, while this isn’t necessarily false across the board, it’s also not necessarily true.
The reality is that if you spend $50k on renovating a property – for instance, putting in a new bathroom and kitchen – you’re not guaranteed to add that $50k to its overall value.
Before doing any renovation work, you need to be as sure as you can that it will be a worthwhile investment and add value to the property when you eventually come to sell it. This can be a tricky thing to gauge, so again it comes down to surrounding yourself with experts and people in the know who can offer you sound advice that you can count on.
Myth 9. You Should Buy a House That You’d Want to Live In
One of the pitfalls that prospective investors fall into is assuming that they’re an expert without having the credentials to back it up. They think that everyone has the same taste and desires as them, and therefore invest in properties that they’d love to live in.
Now, even if you’ve got great taste, this won’t always yield financial rewards. Many factors contribute to the value of a property that you need to take into account, not just those things that are valuable to you personally.
Instead, you need to know what areas are the most valuable on the property market at the time of purchase, and what renovations and upgrades will add genuine value to your property.
You might have noticed that the way to navigate most of these myths and misconceptions is to have expert advice at hand that you can trust to guide you in the right direction.
The most common mistake that people make when getting into property investment is to try and save a few bucks by doing all the research themselves.
Myth 10. Negative gearing is a great investment strategy (especially for the tax benefits)
While many Australians choose negative gearing as part of their property investment strategy, you don’t have to adopt that approach to succeed as an investor and achieve your goals.
Negative gearing is owning a rental property that generates less income than it costs to possess it. As a result, the negative income can be treated as a tax loss that can offset other income, which has had tax paid. The hope with negative gearing is that over time the asset will grow in value, and as it becomes, so will the rental income.
However, this is not always the case. Nobody should ever invest with the idea that running an asset at a loss is a smart investment. Instead, the property asset should be bought with the view that the long-term growth and income will justify the short term lost (and if applicable, losses).
Instead of just focusing on the tax benefits, buying an investment property should be more about the long term performance and how it fits in with your cash flow position. Some household works well with negative gearing as an ancillary benefit because of the high liquidity of their cash flow, but some others might require a positive gearing investment.
Chalk this myth up to property spruikers and investment marketers who have a vested financial interest in getting you to overpay for a property.
Don’t get me wrong, people have made money from negative gearing in Australia, but like any good property tax accountant will tell you – there are better investment strategies out there than relying on negative gearings tax benefits.
What’s a quick example of negative gearing?
Simon buys an investment property, and the expenses for this property are more than the rental income he earns, resulting in a $15,000 annual loss. In other words, Simon has to contribute $1,250 each month from his cash flow to hold the property. As a result, Simon can use this $15,000 annual loss to reduce his taxable income from $110,000 to $95,000 resulting in a $5,850 tax subsidy to Simon. The property still costs Simon $9,150 per year.
Negative gearing is a lousy investment strategy for several reasons.
- It robs your cash flow. In Simon’s case, he needs to pay $1,250 of his income every month to hold the property.
- You can only make money by selling the property. However, remember, each year Simon holds the property it costs him $9,150 after tax.
- It generally relies on you being heavily indebted and can limit the number of investments you can keep. It costs Simon $1,250 every month to hold the property which limits his borrowing capacity.
- Depreciation tax benefits reduce over time.
- It is reliant on a tax strategy that could be removed after the next federal election. Although it should be grandfathered, meaning no retrospective tax changes, so Simon may not be affected.
The truth is, negative gearing relies on you making a loss on an investment property while speculating the capital values will increase enough over the longer term to make a profit. While it can be useful for some investors, it isn’t going to be perfect for everyone, so you should consider looking at positively geared properties or reducing your overall debt position.
Myth 11. Only use interest-only home loans on your investment property
Although interest-only home loans are an excellent tool to manage cash flow, they should only be considered as part of your investment strategy.
After a few years of owning your property and receiving a consistent rental income, your objective should shift to paying off the principal so you can increase the equity in the property.
Typically, a beginning investor or someone with a negatively geared property will need cash flow the most. Therefore they might opt for an interest only loan to secure it.
Then, once they’ve owned the investment property for a time, they have the option of switching towards paying down the principal to increase their equity in the property.
Bottom line, interest-only loans are a tool to be used in connection with a well-planned property investing strategy.
Myth 12. Debt is bad
Previous generations had it ingrained in them that debt was toxic by default, but not all debt is bad. Debt can be used wisely to buy appreciating assets.
Myth 13. There’s nothing affordable left to buy.
When the market is booming, it seems everyone is jumping on the bandwagon and eating up the great deals. Then, when the market is slowing, it seems downright dangerous to dive in. However, just as your mother always said, “You don’t have to do what everyone else is doing.”
When your finances are in order, and you feel ready to invest, do it. If you wait for a perfect deal to fall into your lap, you probably won’t see any results. If you want to get started, going out and talking to someone will likely bring better dividends.
Never forget that so-called bargains may be just the opposite. There is no such thing as a free lunch in this world. If a developer is selling a property for an unbelievable deal, there’s usually a good reason. Take a look at possible motives for selling short. You may want to consult with an expert to determine if you’re being offered a tremendous below-market deal or if you’re being fleeced. You want something with sustainable performance, not just something cheap that would give you grieves down the road.
Myth 14. It takes too much time.
While you may not be a real estate expert, you probably intuitively know quite a bit. To start, spend your Saturdays attending open houses instead of watching football on television. Take some time to peruse the Internet for expert advice instead of searching celebrity news. Visit your local book store and read up on how to get into property investment.
It is true there is no quick way to make a buck, at least not a sustainable one, and anyone who promises such a deal is going to be the only one making a buck. However, if you put in a little time, and get educated about investment prospects, you can see significant results.
Is it true that this researching can take months if not years and it may take up another couple of years to see if you’ve made the right decision, but sitting on the couch doesn’t bring in much cash either?
If you are time poor or is not confident with your research, then the other option is to visit with a Qualified Property Investment Adviser (QPIA). With their formal qualifications in property investing and experience, they would be able to understand your financial position and advise you the type of strategy and property that you should go for. None of these things requires an immediate commitment such as buying a property instantly.
Sometimes, a QPIA might even advise you to save for a little while more but at least you can rest assured that you are on your way to realizing your investment potential.
Myth 15. It’s not worth buying if it’s not close to the CBD
Buying near the CBD is a great strategy. However, it’s not the only place to invest.
While areas close to the CBD do tend to do well in terms of capital growth, that doesn’t mean they’re the only areas with such potential.
Savvy investors, depending upon their particular situation and goals, look for property situated in areas where market drivers are active, even if that takes them outside of the CBD.
So how can you avoid getting caught up in property investing myths?
Education, of course, but not just any education.
Find successful property investors who are further down the property investing road than you are and learn from their mistakes. Meet up with like-minded people to keep yourself grounded in the truths about investing in property and for a bit of encouragement when the going gets a bit rough, or you need some good advice
Although you may assume that buying an investment property within or near the CBD will guarantee that you will not only get a high volume of interested tenants, but you will have a better chance of fast capital growth, this is not always the case. As there is only a limited amount of space within a city center, problems such as traffic congestion and overpopulation can occur.
As there is a limited amount of property available within the CBD area, rental properties are in high demand, and many renters cannot afford to live there.
With work-life balance along with other factors becoming more important, more people are looking to move away from the city center. It is essential that you are still near crucial infrastructures such as public transport, schools, and shopping centers so that tenants will always have easy access to all of the necessities.
A smart investment considers what’s going to make a property desirable to tenants, and proximity to amenities and transport is essential.
Remember, you can improve property structurally and cosmetically, but you can’t change its location. However, that doesn’t mean an investment further afield won’t pay dividends.
Regional cities and outer suburbs can be a valuable addition to a portfolio, providing the other factors line up.
Myth 16. Too many rental properties can affect the neighborhood
Some investors worry whether they are buying in an area that becomes saturated by rental properties and whether it might have a detrimental effect on the neighborhood and property values.
Market forces tend to take care of this argument, and there is presently more demand for rentals than homes to buy, especially in certain areas that are still recovering from the economic downturn where prices crashed, like Florida and Las Vegas.
The evidence of the past suggests that when homebuyers return to the neighborhood in numbers, this has the effect of pushing property values up, which then encourages investor landlords to sell at a profit.
So you shouldn’t be too concerned about the issue of too many rental properties.
Myth 17. Only blue-chip suburbs will make you money.
We cannot emphasize enough the importance of buying in the right location. A fundamental way of explaining is; you can always renovate a property, but you can never move it. You don’t need to be looking solely at high-income neighborhoods. Depending on what strategy suits your financial goals, it may be easier to make money in less affluent suburbs.
Ben Kingsley, our CEO and Founder and the chair of Property Investment Professionals of Australia (PIPA) has said that while buying in a blue-chip suburb has its many investment benefits, buying in an area with a growing income level can be equally attractive. Not only will you be able to find a giant leap in your rental yield, but the capital growth can also be astounding as well. However, similar to any investment, the key is to find the right area that ticks all the boxes and the only way to do that is by thorough research, keen observation, an analytical assessment and last but not least, independent property investment advice.
Remember, you don’t need to look for what is the cheapest, but for something that is a good value.
Myth 18. 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 period. However, growth is not linear – areas that have experienced robust growth will eventually come off the boil, and under-performing areas will come good if the drivers for growth materialize.
My Melbourne purchases in 2008 and 2014 have done extremely well, but I’m not recommending Sydney in 2017, as I can’t see the value.
The big truth as all astute property investors know, it's not the seller that will make you the money, it's the when you buy. You want to get in the right areas before the property cycles reach its a climb. Past historical figures will not give you the details of the rise. Learn from the property cycle and not just look to the past.
Myth 19. It would help if you only bought in locations where you are familiar with.
While it may sound smart, only investing in properties in a location that you know can leave you out in the cold. The best performers are those that fit the market they were designed to meet, and this might not be in your geography dictionary.
When you look at the Australian Property Market, you shouldn’t generalize the performance of property across Australia or just at state or city levels. There is submarket in each market! There are different pockets in each suburb.
The value of a property in one street can differ significantly from a similar property in the next street. So if you live in Melbourne and you find it a great place to live because it was awarded The Most Livable City in the world it does not necessarily mean that it would be a profitable place or time to invest. The Melbourne market might have moved and going into the market at the wrong time could mean buying the property at a premium price.
Instead of just finding investment potentials in the ten suburbs that you are familiar with, the best investment returns can be in another suburb or another state.
The priority is not to find an investment that you can regularly look at but instead, an investment that would generate the best returns that you are hoping to get. So if you are ready to invest but can’t find opportunities in your area, why not get on a plane and look for them elsewhere? If you are unsure on how to do that, get a professional that will do so for you.
Myth 20. The cheaper the property, the less expensive it will be to own.
This is another great pervading untruth. Cheap properties are cheap for a reason. They are likely to be:
- In low demand areas
- An older property
- Attract less rent
- Attract undesirable tenants
- Require more maintenance
- Provide little or no tax relief.
If it weren't any of the above things, it would be more expensive. These items all impact on your capital growth potential.
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 - especially in the long run.
Myth 21. The Australian property market is going to drop 40%
Australia’s property market moves in cycles, and Australia’s largest housing market Sydney has seen values fall 5.6% since their peak in July 2017. However, this is nothing new.
In the GFC we saw Sydney dwelling values fall 7% over 12 months, and after the Sydney Olympics (downturn in 2003-2006) we saw a reduction in costs of 7.1% over the same period. It’s a similar story in Melbourne and the other capital cities. The falls we have seen over the last 12 months have been mild compared to previous downturns.
So what about that 40% fall in property prices?
The forecaster Martin North suggested that the 40% drop in house prices was not his central scenario.
He outlined that for it to happen, there would need to be a “GFC 2.0 scenario” — in other words, a major depression, not just a recession — Australia’s unemployment rates would have to hit 9.5%, mortgage stress levels would need to increase above 40% and bank losses would need to increase fourfold.
What is the most likely scenario?
Each state and city is in its stage, within the property cycle.
Overall, when you are buying a property, you are doing just that: buying the individual property and not the market. So personal property research is critical.
With that being said (and for the haters out there) I believe the positive factors underpinning our property market include:
- Strong population growth and net migration up 27.3% year-on-year;
- Low unemployment and good employment growth, with ABS reporting “trend employment, increased by 303,100 persons (or 2.5 percent), which was above the average annual growth rate over the past 20 years of 2.0 percent”; and
- Inflation is under control, at the lower end of the RBA’s target band of 2-3%.
Myth 22. Rent money is dead money
Yep, that old chestnut.
You should buy where you live, get a massive mortgage, and spend the rest of your life paying it off right?
Have you ever heard of reinvesting? Reinvesting allows you to live where you want, and invest where you can afford.
With Sydney and Melbourne median house prices nudging towards $1 million, saving a deposit seems to be getting harder for most home buyers. So rather than buy on the outskirts, why not rent where you want to live and invest where you can afford?
Here’s why you should consider reinvesting.
- For the lifestyle. You can live close to your work or in the city, and live the lifestyle you want to live.
- Get into the market quicker. In Sydney, the average place will set you back $1 million. To enter the market with a deposit on such a house, you’ll need at least a few hundred thousand dollars, which most people don’t have.
- You can choose where you want to invest. With reinvesting, you don’t need to buy where you want to live. You can spend in outer suburbs or different areas to give you more choice.
- Flexibility. If you own the house you’re living in and decide that you want to travel or move to a new city, you need to sell it. When renting, you can wait until your lease runs out, instead of having mortgage worries. Instead, with reinvesting, you’ll have a property manager who will take care of it, so you have complete flexibility.
- Ability to diversify. If you’ve got a home, you want to try and pay it off as quick as you can. However, if you’ve got an investment property, you can make a minimum payment on your loan and focus on other things. You will be able to diversify your investments — for example in different geographical locations, different asset classes (houses, units or townhouses) or different classifications (shares or property).
Let your landlord worry about the negative gearing, and you worry about investing.
Myth 23. The rental income covers all the property costs
Some property owners assume that as long as the rental income they have coming in pays the mortgage and a little bit over, that they are effectively getting a free ride.
When you factor in the cost of maintenance and insurance, unless you are getting a rental income that is about 130% of your mortgage payment, it is unlikely that the rental income is covering all of your costs each year.
Myth 24. Renovations always add value to the property
As much as we all love watching renovation shows and convince ourselves that we can easily do that ourselves, unfortunately, improvements don’t always add value to a property.
While it might seem reasonably logical spending $40,000 on a new bathroom and kitchen should add $40,000 value to your property, this might not be the case.
Let’s look at some numbers crunched by Michael Matusik using Underwood in Brisbane as an example.
“Our work suggests close to two-thirds of the detached houses resold across South East Queensland over the last decade have had a renovation between sales. Furthermore, we have found that in one out of four cases, the renovation costs were close to half of the previous purchase price. Moreover, in 10% of cases, the cost of this renovation exceeded the cost of the previous total purchase price.”
So while these property owners may have spent more than the previous purchase price on their renovations, they may not have added the same amount to the value of their property.
There is no broad brush approach to property renovations that will work across Australia. However, before you consider any renovation work, it’s worth taking the time to research the local area and speak with local real estate agents. Understand what appeals to local buyers — and how you can maximize the bang for your renovation buck.
Myth 25. Flipping is the best way to make money
For those not familiar with the concept of flipping, it is when you buy an investment property and quickly sell it on again at a higher price for a quick profit.
Flipping was a widespread activity in the last property boom as it was relatively easy to buy a home, watch the market rise in value each month and then sell it on generally within 12 months or so for a higher price.
We are no longer in a bull housing market, and it seems that only about 5% of homes bought by investors were resold within the year. The typical investor will typically hold on to a property for at least five years before considering selling, so you can reasonably assume that at present, flipping is not the best way to make money on property, although it can be profitable if you buy the right price, as a foreclosure for example.
Myth 26. Property investments will make you wealthy
This statement is probably more comfortable to justify as a fact rather than fiction, but there are plenty of caveats to add rather than just making a general assumption that property is the path to your fortune.
Timing and your choice of investments will be an influential factor, but the fact that Fortune magazine concluded in a study of millionaires that 97% of all of their wealth was either created or held in property is a pretty compelling statistic to suggest that real estate creates more millionaires than any other asset class.
It can be challenging to decide whether property investment is right for you. Before pushing the notion away, bear in mind that many of the reasons against it are just myths. Investing can bring returns, although it may take some time to turn a profit.
If you are nervous about trying it alone, contact a qualified property investment adviser. He or she will know what pitfalls to avoid, and what can work best with your financial plans.
Less experienced investors often have preconceived ideas about what type of property or area will give them the best result.
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So what advice can we give to potential investors who are serious about wealth creation? Firstly, start at the beginning. For real wealth creators, the property is the vehicle - not the goal. There are lots of ways that you can use 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 and 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. Happy investing!
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