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There are five key incorrect assumptions that can wreak havoc on investors' portfolios and throw their investment goals off track.
Blogger: Cate Bakos, director, Cate Bakos Property
In my travels as a buyer's advocate, I often come across investors who have either made an assumption, have listened to bad advice, or have been hopelessly optimistic about their property purchase. Their unrealistic expectations have not been based on genuine (and available) information, or they have neglected to identify the growth drivers (or lack thereof) in their given area and property category. I've collated five main unfair expectations:
1. Assuming that the selling agent is giving them the best advice.
Many real estate agents have told buyers that the property which they are selling is a good investment. I've even had real estate agents tell me that inferior-grade properties are good investments. Occasionally a real estate agent will have investment knowledge and experience, but it is more rare than you could imagine. Next time an agent suggests a property is a good investment, ask them a bit about their background and experience as an investor themselves, and explore what other qualifications they may have in relation to asset selection, lending, loan structuring, asset performance analysis and cashflow calculation.
2. Assuming that they are getting independent advice from their 'free' or subsidised 'adviser', or guru, or marketeer.
There are some very polished presenters out there who can whiz through numbers on a whiteboard and demonstrate to the unsuspecting buyer that the off-the-plan or refurbed apartments are a perfect fit for the buyer's strategy, and worse still, a strong performing asset at a fair price, when in actual fact it's a disaster waiting to happen. The questions every buyer should ask are:
- How does this fit my strategy? (ie. What have you gleaned already about my strategy which makes this advice tailored?)
- What are the finalised outgoings? (Many off-the-plan properties are yet to have Owner's Corporation fees worked out and many marketers underquote the real fees)
- What tax rate are you assuming when you tell me that the property will pay for itself?
- Can you provide me with other comparable sales (in this block and in other blocks) to demonstrate that this asking price is fair?
- Can you also provide me with an independent rental appraisal?
- How are you getting paid?
3. Assuming that just because a property is nice, it will rent easily.
Every buyer needs to understand the rental demand, the going rate for a property of their category, the target tenant in the area, the typical tenant cycle and the peak periods. After that, they need to get acquainted with a great property manager in that area. These combined pieces of information can give every investor an edge when it comes to what to look for in a property, and ultimately what to add/spend money on to bolster rental growth and keep ideal tenants.
4. Expecting median rate growth on your investment (or worse still, 'outperformance' growth) if you haven't identified the real growth drivers (or threats to these growth drivers).
Just because others are buying in a particular area doesn't make it a good idea. Often, when there is a sharp explosion in growth in an area, people tend to jump on the bandwagon. Often the masses towards the end are the investors who sustain serious losses when the area is overrun with new developments, and the problems start when the mining site/gas pipeline/major employer decide to scale down the project or shelve it altogether.
Often buyers choose a property in a potentially sound growth area, but neglect to identify what types of properties the demographic are currently commanding. The wrong street, the wrong neighbourhood, the wrong building design or the wrong style can threaten what otherwise could have been a great investment.
5. Assuming that a property is a lemon (or a bad choice) after sustaining a short-term cash-flow downturn.
Sometimes a hefty bill will arise out of the blue. Sometimes a tenant may break a lease. Sometimes a property may take a little while to lease in a difficult part of the market cycle. Sometimes something expensive will break or break down. Sometimes the rental will need to drop.
Things happen. No property is perfect. I always say to clients "It's not if things go wrong, it's when things go wrong. It's what processes you have in place to deal with these events that define you as an investor."
Provided the growth drivers are evident, a good local property manager is on the case, and the right insurances are in place, every investor should try to ride the storm to enjoy the sunshine. Property is a long-term game and performance up close on a chart will always show static spikes and troughs. To declare a property a dud after a cash-flow downturn is thinking short term.