The number of ways you can blow up large amounts of money very quickly is near endless.
Owning race horses, a life high of drugs, playing blackjack casino and even Christmas shopping are almost sure-fire ways to do dough quickly. But, alas, I am inexperienced in these areas, so can’t comment. (Yes, including the last, of which I have no recent experience.)
From what I am qualified to comment on – as a financial adviser and mortgage broker – I would refine a very long list of ways to blow up money to just two. Buying new cars. And buying property from developers.
I’ll be blunt.
I’ve never seen a great news story come from anyone buying an investment from a property developer. Never. Maybe the odd anecdote that would have a “passable” result. (But, seriously, I’ve only said that because the lawyers told me to.)
What I do see from watching others dealing with developers is, overwhelmingly, monetary catastrophe and financial cancers.
Promises built on the lie that “ALL property will eventually appreciate” and that “this property is in demand central”. (No, s–t property won’t appreciate and this particular property is crap.)
I have listened to countless dozens of people tell personal stories of buying development property “a few years ago”, only to have it re-valued for 10, 20, 30 or even 40 per cent less than they paid for it, just years later.
Having been utterly obsessed with the property industry for more than 15 years, I know, inately, why these stories happen. And that is because they paid up to 40 per cent more than the property was ever worth.
Why? It’s really simple.
Properties built by developers are initially worth whatever they can get a sucker to pay for it. The following day, they are worth only what the secondary market will pay for them. Or what banks will value them for.
Investors, usually inexperienced, are lured in by promises of “negative gearing”, “rental guarantees” and “stamp duty concessions”.
A bargain, that will be offered to few! Thppppppt!
Sadly, property developers, in my opinion, are a necessary evil. Nations need a constant flow of new property to deal with ever-growing populations.
Turning soil into a property is expensive. And developers, to keep on building, need to be making a profit (as an industry, if not individually). Governments understand this. So they encourage people to buy new properties by giving stamp duty concessions, or grants.
To be honest, I think governments know they are encouraging dud investments by offering incentives to purchase from developers. But there’s a very big blind eye turned to it. They need new property to be continually added to cities.
Quandry? I also massively believe in property as an investment. I’ve written half finance book titles, most of which are solely about property investment.
Property can be an awesome way to create wealth, done properly.
Over about 15 years of being obsessed with property investment and understanding what drives investment returns, I’ve come up with eight rules to work with.
These are rules I’ve used successfully myself and to help others, as a financial adviser. They are as much about risk minimisation, as they are about growth optimisation.
- No property developers. Ever.
- A minimum land content valuation of 30 per cent. That is, no flats, no high rises. (Essentially, nothing new by developers.) Why? Land appreciates, building depreciate.
- Preferably properties that are 1-5 years old for depreciation. (Notice, not zero years old – never buy brand new properties.)
- Middle ring suburbs. Not the inner city, not the outer suburbs.
- Major metropolises only. Completely avoid rural and regional Australia when it comes to investing, if capital growth is your aim. (Which it should be, as an investor.)
- Underpriced properties in underpriced suburbs. Every major city has underpriced suburbs.
- Reasonable rental returns. Make sure the rental yield is reasonable for the area.
- Proximity to schools, public transport, employment opportunities, etc.
Try these on for size. If you don’t think you’re capable of finding these for yourself, find someone (an adviser who will work with you) who will.
And the second great way to lose money? Cars. Everyone loses on cars. But they truly are a necessary evil. And when has a car salesman ever told you that you’ll make money on buying a car. At least it’s honest.