Biggest risks can be in property

Huge financial disasters, by their very nature, come from positions where the greatest risks are taken.

Sometimes, this is simply rampant stupidity. When a big punt is made and caution is thrown to the wind, along with research and due diligence. Idiocy on a grand scale.

And, sometimes, everything was done right, but a little bit of “life happens” hit the fan.

Without doubt, some of the biggest risks come via property. This is partly because property is such a large single investment, with huge borrowings. And it is such a concentrated investment – you buy just one property in one suburb.

But there are always lessons to be learned. So here we go.

First, a WA grandmother looking to improve her retirement. Teaching had been her career and she had reasonable superannuation savings, and she owned her own home.

Off she went to a seminar of a well-known property spruiker. In quick time, she’d been sold a property in the “next big thing” in some tinpot town in Queensland, two properties in eastern Victoria and another in WA, absolutely nowhere near Perth.

The resource development got cancelled in Queensland, leaving her with a property that she couldn’t get tenanted, because the workers were never hired at the project that never got approval. And neither could she sell it.

The two Victorian properties were rented, but had gone backwards and were unlikely to get back above water for a decade. The regional WA property was also rented, but the prospects of capital growth were limited.

The end result was so much negative equity that it was likely to swallow up all of her super and most of her home. And thread-bare cash flow, because of the untenanted property.

Lessons: Don’t buy property from spruikers or property developers. Never believe any hype about “next big things”, as they usually fall over. And don’t take on too much debt too quickly.

Next …

Three mates decided to buy an investment property together. Everything went swimmingly for the first few years.

After about five years, one of them, about once a year, would contact the other two and say that he wanted out. He wanted to sell.

Each year, they would talk him down “off the ledge”. However, after about three years, they got sick of trying to talk him out of it. If he was continually unhappy, then they should sell up and go their separate ways from an investment perspective. They sold and made a small profit.

A few years further down the track, the real “loss” sunk in. They’d sold just before property prices went for another run. Their timing stunk.

Lessons: If you’re making a big investment, you want to control it. When it comes to property, purchasing with others should be a last resort. There are too many things that can go wrong with any one of the parties (loss of job, divorce, changing priorities) that you are leaving too much to chance.

Similarly, I have just watched a business (let’s call it AAA Pty Ltd) get turfed out of their home, because they didn’t control their property.

AAA was sub-leasing space from another business (which we’ll call XYZ Pty Ltd), on a handshake deal. The owners of the two businesses were friends, but XYZ was the listed tenant. XYZ told AAA the lease would be extended beyond the original five years.

Soon after, XYZ stopped paying rent to the landlord. The first AAA knew about it was when the agent erected a “for lease” sign on the front of the building.

An expensive, mad, panic ensued. Finding a commercial space for a business is time consuming and costly. Massive disruption to the business and its clients. A cost of tens of thousands of dollars.

Lessons: Again, property is a big investment, even if leasing. You need to control it. And when dealing with mates, don’t rely on handshakes.

I’m a cautious sort of guy. I know, and play, the percentages. I dream in numbers. My big financial decisions are rarely made without considerable thought. I lay off (insure) risk where it makes sense.

But no-one scores perfectly always.

I’ve just come through a $20,000-plus disaster with junkie tenants. Six months without rent and malicious damage of the property as he left.

Lessons: Insurers don’t cover animal damage (even if the tenant lied and said they didn’t have pets) and their definition of malicious damage, which they will pay for, and “wear and tear”, is considerably different to mine!

Here endeth today’s property lessons.

Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.