Nine reasons why you shouldn’t buy an investment property
Friday, July 7, 2017/
Are you looking to get into property investment, or maybe you’re keen to add to your existing property portfolio?
Well, maybe you should. But maybe you shouldn’t.
Fact is, I’ve spoken with hundreds of investors in my time and I’m often surprised when they tell me their reasons for investing in real estate.
Many just get it wrong.
You see, while property investment is an excellent vehicle for growing lasting wealth, occasionally it’s the wrong fit for particular people.
In fact, sometimes, there are some very legitimate reasons why you just shouldn’t do it.
So you shouldn’t buy an investment property if any of the following reasons relates to you.
1. You’re buying a property to pay less tax
Many naïve investors think negative gearing is an investment strategy.
Their accountant tells them they need to save tax so they chase tax deductions or depreciation benefits and as a result, they often overpay for new or off-the-plan properties while ignoring the fundamentals of property investment.
They think they need negative gearing and get excited that for every dollar they lose, they save 49 cents.
Now that’s crazy, especially as new stock almost always comes at a premium and has limited (if any) medium-term capital growth prospects.
That’s not the way to grow your wealth through property.
Just to make things clear…A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and depreciation – exceed the income it produces.
In my mind this is not an investment strategy – it’s a short-term funding strategy, which only makes sense when used to purchase high capital growth investment grade properties. These tend to be established houses, townhouses or apartments in desirable streets in top locations in the inner and middle ring suburbs of our 3 big capital cities.
2. You’re buying because you’re disappointed you’ve missed the recent property boom.
Have you heard of F.O.MO? It’s the Fear Of Missing Out.
It usually happens at this stage of every property cycle when people read of the windfalls made by those who bought property a few years ago, however, this is the time of the property cycle you need to be more cautious in your investing rather than over-optimistic.
Of course, it’s an understandable emotion, but investing with emotion leads to bad judgement.
And it is exactly this type of emotion that makes you easy prey for the property marketers and spruikers who will offer you a way to get rich quickly.
3. You want to get rich quick
Many beginning investors want to ‘get rich quick’. However, property investing is a long-term endeavour.
I’ve found it takes average property investor 30 years to become financially free.
Often it takes 10 years to learn what not to do. We all make investment mistakes when we start out.
It takes three to five years to undo the mistakes of the first decade, often selling off under-performing properties.
Then it takes two good property cycles to build a substantial asset base of investment-grade properties
Warren Buffet said it well when he said: “Wealth is the transfer of money from the impatient to the patient.”
4. You don’t really understand how property investment works
Many people mistakenly believe they understand property investment because they own a house or have lived in one.
So they end up buying a property close to where they want to live, where they want to retire or where they holiday.
Again, these are emotional reasons to purchase a property rather than selecting based on sound investment fundamentals.
On the other hand, successful investors have formulated a sound investment strategy that suits their risk profile and helps them achieve their long-term goals.
5. If you’re not financially fluent
If you haven’t learned how to budget, spend less than you earn and save, or if you’re not good at handling debt then property investment may not be for you because the large amount of debt you’ll take on for your investment will either get you into financial trouble or keep you awake at night.
Of course, if you’re scared of debt, and many people are because they don’t fully understand the difference between bad debt and good debt, then steer clear of property until you better understand the power of leverage, compounding and time has on well-located properties.
6. If you want a multipurpose property
If you are buying your property with the aim of creating wealth but also as your future home, or as a part-time holiday home or somewhere to retire in the future, then perhaps you are wanting that one little property to achieve too much.
I’ve never found that a mixed-use property delivers premium investment returns – something has to give. For one, there are too many emotional factors at play.
Of course, adhering to a proven investment strategy will mean you’re more likely to buy an investment-grade property and not make this type of mistake.
7. If your finances are not in order
Property investment is a game of finance with some real estate thrown in the middle.
To get into property you should have a stable job, profession or business with a steady income and need to be attractive to the banks so they lend you money plus you should have sufficient stashed away in a financial buffer to see you through the inevitable rainy days ahead.
8. You don’t have enough money
If you can’t afford an investment grade property, either because you haven’t saved a sufficient deposit or you can’t service the loan repayments, then rather than buying a secondary property, in my mind it’s better that you wait and buy an investment-grade property.
One of the reasons that around 50% of those who get into real estate sell up in the first 5 years and the main reason around 70% of investors never buy more than one investment property is because the first property they buy underperforms and they lose confidence.
In my mind, less than five% of the properties currently on the market are “investment grade”, or the type of property that will outperform the averages with wealth producing rates of return and stability of price when the markets eventually turn.
This means you need to buy the right property in the right location (remembering that the correct location will deliver around 80% of your property’s performance.)
So, if you can’t afford this type of property sometimes the right thing to do is “nothing.”
You make your money when you buy your property, not because you buy it cheaply, but because you buy the right property.
9. You’re trying to time the market or find the next hotspot
Sure property markets move in cycles and it would be great to buy near the bottom, or find a location that will be the next hotspot, but the landscape is littered with investors who tried to time the market and failed.
Instead, the right time to buy real estate is when your finances are in order and you’ve got the ability to purchase an investment grade property. Remember there is not one property market in Australia so there will always be opportunities somewhere.
Rather than wait and buy real estate; you buy real estate and wait.
The bottom line
When it comes to buying property, there are plenty of reasons to take action, but there are just as many reasons to hit the pause button.
If you’re not sure on your next move, speaking with a professional property advisor may give you the clarity and direction you need to move forward with purpose.