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The stakes are high, the gearing a bit dizzy … it’s a love affair that keeps Australians smitten, even though so many are so bad at this game.
Property is that lump of coal that so many of us try to squeeze into a diamond. Some do. Some don’t.
Me? Property became an obsession in 1999. There was a “book that changed my life”. For the next decade, I spent more time studying property than I spent doing anything. (Except, perhaps, drinking beer.)
I learned plenty. I formed some pretty strong opinions on what makes “good” property and what makes “bad” property.
But in the decade that followed, those opinions have hardened, like concrete, listening to others’ stories about their experiences with property investment.
Most of them make me ill. And angry. Property, as an investment, shouldn’t be that difficult. And certainly shouldn’t ruin so many people’s finances.
Here are the top five mistakes I see repeated time and again.
- Buying from developers
Don’t believe their bollocks. Developers don’t leave money on the table. The opposite. They generally leave you with a immediate loss. If there was anything left to squeeze out of this transaction, they will get you to pay it.
The most frequent story? “I bought a new property three years ago for $450,000. I’ve just had it revalued by the bank. And they valued it at $380,000.”
Sadly, I deliver the message I could have delivered before they bought. “It was only ever worth $380,000.” The rest of the money was sucked into developer’s profits, GST and, usually, a huge commission to a salesman or marketing costs.
I’m still waiting to hear a good story about buying from a developer. Maybe one day, but I won’t hold my breath.
- Buying in rural and regional areas
A large part of property’s returns are due to “the scarcity of land”. There is scarcity of land in Australia’s largest cities. Everywhere else … not so much.
Property In rural and regional Australia, there is no scarcity of land. At all.
They can build new suburbs, new estates, new communities on land that costs three parts of five-eighths of not very much. In these areas, another suburb/estate/community can be built right across the road.
Capital growth in property requires land content. See rule 3.
- I bought a flat/apartment.
Again, scarcity is what drives property values. Buildings can be built into the sky, almost infinitely.
Property with a minimum land content of 30 per cent will not include apartments and flats.
Land appreciates. Buildings depreciate. Buying so much of the thing that will fall down over time (the building) versus the rare thing (land) is just a recipe for disaster.
- Buying the NBT – Next Big Thing
I’ve heard a gazillion horror stories of people buying the story about the next big mining/resources development.
One anecdote, which sums them up. “I paid $450,000 for a place that initially rented for $700 a week. A year later, it was renting for $900 a week and the property was valued at $700,000. Three years later, I’m getting $180 a week and the local agent said I’d be lucky to get $190,000 if I were to sell it. Now I can’t afford to sell it. But I can’t afford to hold it.”
They bought the bull. And they’ll be paying for it for decades.
Steer clear of the NBT. You don’t know what you’re doing. You will lose lots of money. Probably hundreds of thousands of dollars.
- Financing For Dummies
Outside of picking the wrong, or just plain crap, property, the biggest problem is stuffing up the financing. Which I have literally filled a book about (Mortgages Made Easy).
Most people think getting financing is as simple as going to the bank and getting a loan. It’s not. Banks will not look after you. They will look after themselves. They will protect their loan.
Speak to a mortgage broker who knows about property investment and about how to structure investment loans so they protect you, not the bank.
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I’ve got rules for buying property. Most of them are hard – I’d never shift an inch on them. Some others have a little flexibility about them.
But the above? Never. Ever. Rookie errors, all. Avoid these and you’ve avoided the worst half of the property market.
Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E: bruce@brucebrammallfinancial.com.au.