Lessons from my biggest property investment mistake

1. Many are promoting how much equity they gained during a historically significant Sydney market run. It was an extraordinary period of capital gains. Quite frankly, just about anyone capable of signing their name and securing finance in 2015 or before looks like a mastermind now.

2. Experience is the best teacher. As such, I like experts who’ve bled a little in the process of investing across multiple cycles. They’ve had skin in the game and endured a couple of hard-learned lessons via their mistakes.

After almost three decades of investing, and exposure to numerous price phases across various markets throughout the nation’s broad geography, I’ve learned a thing or two.

While I could rabbit on ad infinitum about my wins, it’s far more interesting to hear about those times where experience gave me a tough education. Not only does it keep my own investing in perspective, it also allows clients to learn from my errors without having to lose any of their own hard-earned money.

So, with this in mind, let me share details of the property deal that has taught me plenty, including a little humility.

My most disastrous deal

Back in the early 2000s, I considered myself an experienced real estate investor with all the answers.

I had, in very quick time, purchased half a dozen properties basing my decisions on the fundamentals and gearing myself towards capital growth. And boy – had it paid off! My first investment doubled in value in under 12 months. The others had all done similarly impressive numbers. I was sitting on some healthy equity and believed I had cracked the code.

This property investing game seemed pretty easy to win.

My plans had always been to buy 10 investments, sell five and keep five… but it started to feel too simple.

So, with brimming confidence and easy access to credit, I was bullet-proof and cashed up and decided to move beyond my tried-and-true strategy.

Holiday romance

I had been regularly holidaying at a waterside location and loved it. It was during one of these visits I decided to purchase a unit to add to my growing portfolio. It all looked like upside to me.

I could buy an off-the-plan (OTP) serviced apartment in one of my favourite locations. The management would be taken care of and, best of all, I could use it whenever I wanted – which I reasoned would be all the time. I couldn’t wait for weekends spent on the balcony overlooking the marina.

It was too perfect – a no-money-down deal that would rocket in value like the rest. In hindsight, it was the holy trinity of what not to buy – an OTP serviced apartment in a holiday let area. But I was smarter than the market, so I reasoned it would be no problem.

That’s how I came to sign on the dotted line and acquire the apartment for $365,000. It was one of the final units on offer in this development, and construction was well underway, so I knew I would take possession in a few short months.

And things kicked off nicely. A valuation soon after I took the keys saw its value assessed at $450,000 – not a bad gain! I was sitting pretty and feeling a bit smug.

So, where’s the mistake? Well, here’s how that property currently sits in my portfolio after holding it for over 15 years:

Its market value as at today is… $365,000! An astonishing 0.0 per cent growth.

Its rental income is driven by holiday letting, so it’s an exhausting feast-or-famine situation on the cash flow.

It gets worse – I have analysed the numbers and they show 51 cents of every dollar of rental income goes toward cleaning and management fees. That’s before I pay the mortgage or cover incidentals like council rates, electricity and strata fees.

Finally, do you know how often I’ve used the unit for myself and my family to enjoy?

Exactly three times in the past 16 years. The reason? The only time I want to use it is during school holidays, and that’s when it earns me the most income.

In addition, if I do use it, I still have to pay cleaning and other fees, so I’d rather it was rented by someone else. In fact, I’ve even rented units in the same complex during holidays because I didn’t want to do myself out of any income!

Lessons learned

What has my “prime coastal investment” taught me?

1 – Ego and greed are bad. I was too confident in my limited abilities, so I flipped from being an investor, to becoming a speculator.

2 – Stick to your fundamentals and avoid the excitement. Be boring because boring works. Gradual, long-term investing brings far greater rewards.

3 – Take the emotion out of consideration. I thought I’d found my dream holiday holding and would use it every chance I could. That’s not what a smart investment is for.

Silver-lining solution

So, there it is folks, a spectacular fail that I’ve been paying off for a decade and half.

But here are the upsides.

Firstly – because I recognised reasonably quickly what an appalling investment the property was, I took steps to ensure my next few acquisitions were cash flow generators with strong growth potential to help offset the debt from this dud buy. These supporting investments have proved to be some of the most successful in my portfolio.

Secondly – this unit is a tangible touchstone that keeps me grounded. It is a very real reminder not to be blinded by my own pride and to stick with the fundamentals. In my world, investment should be boring and long-term. This unit keeps that drive for “excitement” in check.

Finally – my clients get to benefit from my failings without having to take any financial risk. I constantly apply the lessons learned in my business.

As for the unit, well, I still own the lemon. I set up financial safety nets to stop the hurt, and I can’t stomach selling it off. There is also probably a little bit of me that wants to justify its purchase, I guess. We all hate to be wrong.

But I can say with confidence that while I’m not proud of this purchase, it did help build me into the investor I am today. Without having taken this financial flesh wound, and establishing a workable solution, I wouldn’t have the ability to navigate the path that’s led to all my subsequent successful investments. Every month when I get my management statement, it’s like a refresher course. A constant reminder telling me to “keep it real”.

By Steve Waters, Right Property Group