AU Investing in property, are you sure?
Property Here - Wednesday, May 22, 2013
TWO out of three investment properties lose money, so should you really be committing to this form of investment, asks Andrew Winter.
I've 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 that 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 advert, but it is the principal. The celebration with any property investment should only be at 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.
I do genuinely believe 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 within in a market with longevity. There will always be a real bargain that can be sold for a quick profit, but these days they really are as rare as hen’s teeth and you certainly will not hear about them at any investor seminar.
This advertisement typifies the relaxed way that as a nation we view residential property investment. It worries me. We have come off the back of some prosperous decades, so it is understandable. But we now have massive stamp duty, agent’s fees which are percentage based and if we go into these investments expecting capital growth at the same rate as parts of the 90s and the noughties I do feel we could be disappointed.
Some fairly disturbing statistics were released from RP Data this month sourced from the ATO, covering the 2011 financial year.
Now if you are considering an investment property I don’t want to put you off, but I do want you to go into it with your eyes wide open, fully understanding the risks.
According to the ATO about 1.8 million 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 average, per year. More worrying is the facts that around 72 per cent of the people who own these investment properties earn salaries of $80,000 per annum or less.
Yes, we negative gear to save tax. But for what seems the majority, that tax saving will in no way be covering 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. As such I do believe the percentage growth is not likely to be on the scale of previous decades.
This does sound all doom and gloom - my apologies. 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. And why would you need to add someone else - who clearly wants to make a profit out of your transaction - into the mix? 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. To do that, make sure you are really informed and do not have presumptions that may not be in line with reality.
Read more: http://www.news.com.au/realestate/experts/investing-in-property-are-you-sure/story-fncv4m8d-1226648298246#ixzz2TzlmlEsX