Most investors never make it past one investment property. The research indicates most Australians who buy an investment property no longer own that property – or any investment properties – within five years.
Sadly, many investors have bad experiences. They start from a base of little knowledge, compound it by failing to conduct (or pay for) quality research and ultimately make poor decisions.
I recently hosted a webinar which featured David McMillan, director of Performance Property Advisory, who said many investors fall victim to a series of myths and pitfalls.
- Believing that property doubles every seven to 10 years on average.
- Listening to mainstream media.
- Failing to carry out proper research or being unwilling to pay for research.
- Preferring, instead, to access free advice, which ultimately can be costly.
- Failing to realise that the goal is not to buy property, but to build wealth.
- Buying negatively-geared property in areas where values are not rising.
- The “location location location” mantra, “an excuse for people to be complacent”.
- Wanting to own local property so they can drive past to check on it.
- Believing extreme bull or bear predictions.
“The property market does not double every seven to 10 years on average,” McMillan said. “This is one of the biggest myths in real estate. The agents have been very good at persuading the market that this is what happens. But doubling cycles are between 10 and 15 years.”
I agree with him. A 10% annual growth rate average was required for property to double every seven years, but the national capital city average for the past decade is 5.4% per year.
McMillan also shares my views about the real estate content of metropolitan newspapers. “A lot of what appears in mainstream media is what I call ‘noise’, which can distract investors and cause them to make mistakes by making decisions based on misinformation,” he said.
McMillan said people should never buy property unless it had a good chance of achieving at least 25% capital growth in the first three to four years of ownership.
“The only way to grow your portfolio is by owning property which gives you short-term growth,” he said. “As one example, investors should avoid Melbourne’s inner-city apartment market. The chances of any growth in the next three to years are minimal. If an investor is spending $500,000 in this market, in three years it will still be worth $500,000 or possibly $480,000 or less.”
McMillan said Performance Property Advisory considered Sydney, Melbourne, Brisbane, Perth and Adelaide to be the primary markets for investors, while Newcastle, Canberra, Sunshine Coast, Wollongong, Hobart, Geelong, Townsville, Cairns, Ballarat and Bendigo were good secondary markets.
He said land content was a significant driver of capital growth, while dwellings on the land were drivers of cash flow. “Buy property that has at least 65% land value,” he said.
McMillan advised investors to avoid small towns, mining towns, markets with poor capital growth records, and areas with an abundance of land able to be developed. “I would avoid mining towns altogether, especially if you are a first time investor,” he said. “The returns may be there in some years, but mining towns will always be boom and bust markets.”
Factors to avoid with individual properties include locations on main roads, being next to commercial uses including offices and service stations, and being close to train lines. “Buy close to train stations, certainly, but not abutting train lines,” he said.
McMillan urged buyers to avoid properties with noise issues, safety concerns and privacy issues. He also opposed “generic property” which lacked a scarcity element, such as modern highrise apartments.
He said investors should shun apartment buildings with more than 20 units and lots of common amenities such as pools, gyms and lifts – which increase liability and strata fees.
He said new developments often had low ceiling heights, small bedrooms, poor natural light, limited car parking and poor storage. “Owner occupiers will never want to live in them long-term. They will always be traded investor to investor.”
He preferred smaller boutique unit blocks, preferably with only half a dozen units, with individual character and good features. “Unit blocks built before the 1980s tend to have the best features,” he said. “In addition, you should aim for body corporate fees to be about 0.5% of property value.”
Generally, he recommended investors buy established property rather than new. “Established property is better value from a land content viewpoint and from a scarcity viewpoint. Units have land content but the land content with new high-rise units is very low, whereas with the older-style boutique buildings it’s high.”
This is reinforced by individual research showing that units in boutique blocks show much higher capital growth than units in generic highrise buildings.
This article originally appeared on Property Observer.