‘Din­ner party’ homes a trap

The Advertiser - Real Estate - - Front Page -

EGO can be a dirty word in the world of real es­tate in­vest­ment. Many peo­ple as­pire to buy a prop­erty in a flashy area but putting this ahead of com­mon sense can be dan­ger­ous to their fi­nan­cial health – par­tic­u­larly in to­day’s mar­ket.

I’ve al­ways been a fan of ‘‘bite off more than you can chew then chew like hell’’ when it comes to in­vest­ing, and I’ve been chew­ing hum­ble pie in re­cent years with prop­erty go­ing nowhere and shares go­ing back­wards.

His­tor­i­cally, buy­ing big gave you big­ger re­turns. Real es­tate agents have long said Ade­laide’s best cap­i­tal growth comes from near-city and beach­side sub­urbs.

The numbers also stack up. A 10 per cent an­nual gain on a $500,000 prop­erty gives you $50,000 while the same gain on a $300,000 prop­erty is just $30,000.

But when mar­kets are stag­nant or in re­verse, re­pay­ments on a much larger loan can turn into a hor­ror movie for in­vestors and owner-oc­cu­piers.

Smart Prop­erty Ad­viser di­rec­tor Kevin Lee says peo­ple of­ten buy real es­tate in a per­ceived af­flu­ent area be­cause of their own prej­u­dices, a mis­taken view it will de­liver bet­ter cap­i­tal growth, or be­cause of their ego.

‘‘Too many peo­ple pur­chase an in­vest­ment prop­erty driven by the de­sire to im­press their friends at the next din­ner party, in­stead of mak­ing a sound in­vest­ment de­ci­sion,’’ he says.

‘‘Gen­er­ally speak­ing, these din­ner party prop­er­ties end up be­ing mas­sively neg­a­tively geared. Neg­a­tive gear­ing to this ex­tent is not a smart strat­egy and it’s the num­ber one rea­son why so many Aus­tralians own only one in­vest­ment prop­erty.’’

Mr Lee rec­om­mends in­vestors seek cheaper prop­er­ties fur­ther away from the CBD, where 80 per cent of the pop­u­la­tion can af­ford to rent and 80 per cent can af­ford to buy it. ‘‘Buy­ing a prop­erty that is con­sid­er­ably neg­a­tively geared means that you’re hop­ing and pray­ing the prop­erty will en­joy good cap­i­tal growth in the com­ing years to off­set the con­sid­er­able amount of money you’ve been out of pocket fund­ing it week-in, week-out,’’ he says.

Chang­ing de­mo­graph­ics are an­other con­cern. The first Baby Boomers turn 65 this year and may soon look to down­size their ex­pen­sive homes. At the same time, younger gen­er­a­tions are not view­ing prop­erty like their par­ents did and some have given up on home own­er­ship be­cause of the high cost.

Laws of sup­ply and de­mand sug­gest a flood of high-priced prop­er­ties on the mar­ket will push those prices down, as cheaper homes en­joy some time in the sun.

Real es­tate de­liv­ered great long-term gains to in­vestors liv­ing in the 1970s and 1980s, when house prices were be­low $50,000. Now ev­ery­one’s on the prop­erty band­wagon, so the gains will take longer.

Prop­erty in­vest­ment should have a min­i­mum 10-year time-frame. So prices bet­ter rise over the next eight years. Or else.

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