Look before you leap into investment property
IHAVE noticed an ad on the television that has got me worried. The ad, which promotes property finance and mortgages, shows a young guy jumping up and down with glee at the news he has just been told he is eligible for a mortgage to buy an investment property. Hurray! He cannot believe his luck.
My awkwardness revolves around the fact he is clearly surprised. Which leads me to ask: should he really be committing to this form of investment?
I know it is only an ad, but it is the principle. The celebration should be knowing you have secured a property at a competitive price, rented it out for top dollar, or sold it at the height of the market. You should not celebrate the securing of a debt.
With clearance rates rising and home values stabilising, there has been a rush to forget that, as a nation, we have only just scraped through a massive global financial crisis. Our housing market is hanging in there, our inflation is minimal but our economy is, let us say, on a knife edge.
Property is an excellent long-term investment, but only when bought at the right time, at the right price, with the right form of rental demand and in a market with longevity. There will always be a real bargain that can be sold for a quick profit, but these days they are rare.
This advertisement typifies the relaxed way we view residential property investment. We now have massive stamp duty and agent fees which are percentage-based.
If we go into these investments expecting capital growth at the same rate as parts of the Nineties and the Noughties I do feel we could be disappointed.
RP Data has released some fairly disturbing statistics, sourced from the Australian Tax Office, covering the 2011 financial year.
According to the ATO about 1.8 million people own an investment rental property, and 1.2 million show an annual loss. That means two out of three investment properties lose money.
On average, these properties lose a massive $11,000 per year. More worrying is the fact that about 72 per cent of the people who own these investment properties earn salaries of $80,000 or less.
Yes, we negative gear to save tax. But, for what seems to be the majority, that tax saving will not cover the loss, so every year these property owners are losing money. The capital growth is, of course, the main reason we all invest, but growth levels are now much lower than they were and that growth has to now cover stamp duty and in most cases monthly losses.
This does sound all doom and gloom. But it is clear that if you decide to invest you must ensure you really can afford it, which means you are prepared to own that property for a really long period, as selling too soon could mean a real financial hit.
My advice is simple: consider your attitude to risk. Areas like mining towns and sea-change locations may have great numbers now but they are still high-risk, especially if your timing is too late and you are paying the boom price.
Avoid buying through investment and wealth creation groups. Many are not licensed like real estate agents or developers.
Sure, attend the seminars, but then buy directly from agents or developers. Do not ever believe the hype or guarantees of marketers.
Investing in property is still worthwhile. But the aim of an investment property is to help you build your wealth, not lose it.
Make sure you are informed and do not have presumptions that may not be in line with reality.