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Numerous theories and viewpoints abound on the ins and outs of property investing and you don’t have to look too far to find a friend, relative or work colleague prepared to share their views on how to make money from property.
Blogger: Kevin Lee, director, Smart Property Adviser
But when you do discuss property investment, remember that there a strategies that work and strategies that are nothing more than myths that can do you property investors a great disservice.
To warn you, here are three common property investment myths:
Myth 1: Negatively geared properties save tax
Negative gearing will send the average family broke, it is something high income earners do to save some tax, but it’s not a smart property strategy and it’s not a good way for most people to build wealth.”
Negative gearing was a particularly outdated strategy in light of the fact that tax rates had actually decreased over the past 10 years.
Rather than focusing on getting the taxman to help you pay for your property, investors should be buying property where the tenant is helping to pay for it. That makes a lot more sense.
If your property is negatively geared it means you’re funding your tenant’s lifestyle, because they are not paying the true cost of living in that property. Investors shouldn’t be funding their tenant’s lifestyle – it should be the other way around.
Myth 2: The long-term capital growth on your investment property will compensate for the fact it is negatively geared and requires ongoing additional funds
I believe it is getting harder and harder to justify the “dream” of strong capital growth, particularly with properties in the higher price brackets. My view is that in the coming years, property investors could be disappointed by the capital growth of their properties.
If you buy a property that is neutrally geared from day one, it doesn’t matter whether there’s any capital growth. Why? Because rents will continue to rise in the fullness of time and you can then turn those rents into paying down the principal on that loan and eventually you actually own all of it or a large percentage of it outright.
There could still be some capital growth, so you’re still miles in front than the investor who is betting solely on great capital growth.
Myth 3: It’s virtually impossible to buy neutral or positively geared properties in Australia today
At the heart of my property investment strategy is a focus on buying neutral or positively geared properties with cash deposits, with the income (in the form of rent) equalling or even exceeding the associated costs.
When I explain this, many people tell me that it can’t be done in Australia today or they say it can only be done in remote regional areas and they don’t want to invest there. Well that’s just not the case – I could go to any city in Australia and find properties where it can be done.
The key is to invest in affordable properties in lower socio-economic areas, where at least 80% of the population can afford to rent. These types of property can be neutrally geared from day one.
Myth 4: You should only ever have an interest only loan on your investment property
While interest only loans have their place in property investing as a tool to manage cash flow, they are only part of the strategy.
“Interest only loans” go hand-in-hand with negative gearing because you need to reduce your outgoing as much as possible, and that is also the case to a degree in the early days of owning a neutral or positively geared property.
However, after a couple of years of ownership and increases in the rent you are receiving, the aim should be to start paying off the principal so you can increase the amount of equity you have in the property.
Myth 5: Building wealth through property can be done quickly if I follow the advice of this off-the-plan apartment salesperson/developer/real estate agent/ property spruiker
Looking for a quick fix in property is “dangerous” as the person buying the quick fix is quite likely to get ripped off – generally, only the person selling the fix makes money.
While it might be uncomfortable to hear, our desire for a quick fix is driven by greed. We get greedy because we want more or better but we don’t want to work for it. We need to be prepared to do the hard yards and educate ourselves about investing in property. If you’re prepared to go out and learn you will mitigate your chance of being ripped off because you’re in control.
You need to accept that achieving what you want will not happen overnight – it’s more likely going to take something like 10 years. But it will be worth it and it will give you the result you were looking for.
These popular myths have ‘suckered in’ too many Australians for too long. They create the wrong mindset in people and are the reason why the vast majority of property investors never own more than one investment property. Be wary of these myths and remember that the key to property investment success is property investment education.