Successful property investors need to learn to recognise fact from fiction. Here are some common myths that have evolved around how to profit from property.
Blogger: Victor Kumar, Right Property Group
More Australians accumulate wealth through property than any other asset. According to last year’s CoreLogic Capital Assets report, the Australian residential property market was valued at an estimated $5.2 trillion in January 2014. Today that figure would be even higher. It is hardly surprising, in such a large industry, that myths and rumours abound. Often this is just because no-one bothers to challenge industry claims – sometimes, though, myths around property investing can be used to deceive novice (or even experienced) investors.
Successful property investors need to learn to recognise fact from fiction and challenge what they read or hear in the media or from ‘experts’. Here are some common myths that have evolved around property investing and we challenge these below.
Myth #1: You only make a profit when you sell
You hear this myth, in relation to defending a sale price, or from real estate agents keen to list your property for sale. This myth is false on two fronts. Firstly, you can make a great deal of profit on your property if you buy well. The lower the price you pay for a property, the greater and quicker the capital gain. This brings us to the second falsehood, you don’t actually have to sell your property to realise the profit. It is the equity in your property that is important and lenders will allow you to increase your borrowing, by leveraging off equity in your existing investments, to buy more property. In fact, selling to take a profit can be a mistake as you will most likely be liable for capital gains tax. It could be much better to leverage off the equity and avoid selling until you are in a lower tax bracket (when you reach retirement age) or not at all.
Myth #2: I'm an adviser, trust me
Recently, two of Australia’s big banks have been hit by scandal, as unscrupulous financial advisers have been uncovered. The property industry is not immune to poor practice either. With over $5.2 trillion in the property market it is inevitable that there will be some ‘shonky’ advisers who see the potential to exploit naïve or trusting investors. When you deal with property investment companies you should find out if they are members of PIPA – the Property Investment Professionals of Australia – and whether they have CURRENT real-life experience in the strategy they are helping you implement. It is important to seek out good advice, find referrals and learn to distinguish advice from spruiking and sales talk. Just because someone tells you they are an ‘expert’ adviser, doesn’t mean that they are.
Myth #3: Property prices will always go up
You can be forgiven for believing that property prices always go up. Indeed, between 1996 and 2010, real prices increased by 77% and 178% for Sydney and Melbourne, respectively! However, property is a cyclical investment, meaning there will be periods of no growth in some areas of the market, and after a boom, there often comes a bust. You only need to look at mining towns around Australia at the moment – much of the property in these areas has fallen by 50% since the highs of 2012. The Australian property market comprises hundreds of ‘markets’ – CBD markets, suburban, outer suburban and regional. Collectively, over time, the overall value of property increases, however, individual areas can show low or no growth from time to time or even sharp corrections.
Myth #4: Rental guarantees secure your rental income
Most property investors look for strong cash flows from their investments and they are tempted to accept promises of rental ‘guarantees’ at face value. Rental guarantees promise an attractive level of rental return from day one, usually for the first 12 to 24 months of ownership. Rental returns are usually attached to newly-built properties, off-the-plan properties or specialist niche- accommodation, such as student or holiday rental property.
It is, however, a myth that rental guarantees offer surety of ongoing strong tenancies. Often, you find that the vendor or developer offers a rental guarantee that they are prepared to fund themselves, and they inflate the purchase price to cover this cost of business. To find out if this is the case with a property that you are considering, carry out your due diligence thoroughly. Research other similar properties in the area, talk to property managers and establish that the rental guarantee is at market value and it will be easy to achieve the same rental return after the rental guarantee period has expired.
In conclusion, as we head into a heated market in most areas, I am seeing increasingly new investors afraid to “miss out”, and often turning a blind eye to all the warning signs. If we stuck to some basic due diligence and didn’t get caught up in the hype, we would then not be caught up in a purchase that we may come to regret down the track.