Look be­fore you leap into in­vest­ment prop­erty

The Weekend Post - Real Estate - - Front Page -

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.

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