top 5 myths of property inevsting

Personal Finance,Property

Let’s Bust the Top 5 Myths of Property Investment

17 Nov , 2015  

Schuman Zhang

Schuman Zhang

Business Specialist at Proadviser.com.au
Schuman is an avid reader, writer and curator in personal finance, investment and entrepreneurial communities. He joined the Proadviser team to help grow the professional advisers marketplace and help consumers get the right advice. To get started simply click on “Ask An Adviser”
Schuman Zhang

Australians love property. Anyone who bought a property in the last 20 years would likely have earned a handsome return. Property investment may be popular, but it is far from easy. In this article, we explore and then bust the top 5 myths of property investment in Australia.

 

All property will increase in value

One of the most common views is that property will definitely increase in value over time. After all, you can’t make anymore land. This is a misconception. While it has been generally true for Australian properties, multiple other factors would also determine a property’s capital growth potential. Take for example a studio apartment near Ultimo, NSW. Although rental yields are healthy, there has been virtually no capital growth for the past 15 years. When buying a property, take into account the type of property, the demographics of the neighbourhood, the location of the property and other physical characteristics.

The property market is also cyclical in nature (very similar to the economic cycle). There will be periods of growth and periods of decline. Depending on location, some places may fall in value permanently, such as a mining town after the resources boom.

property cycle

Courtesy of www.propertyupdate.com.au. Property markets are cyclical in nature

 

 

 

 

 

 

 

 

 

 

 

It is not possible to find neutrally or positively geared properties

You’ve probably heard this one many times. There are no positively geared properties out there. Even if they’re out there, chances are they won’t have any capital growth and would therefore be poor investments.

Is it possible to find a property where rental income exceeds mortgage repayments? The obvious answer is depending on how much cash you put down as a deposit. Besides from the size of your initial deposit, a good place to look for positively geared properties is usually in low social economic areas, but at least 85% of the population there can afford to rent. Also, small renovations and home improvements can add more value to the property, meaning you can buy a bargain property and then enabling you to charge more for rental income.

 

Negatively geared properties will is a sure-fire win

Negatively geared properties (where rental income is less than your mortgage repayment) may have some tax incentives, but the most important consideration is whether they will achieve the requisite capital growth to compensate for your negative cash flow. Never buy a property solely for the tax incentives.

Since servicing a negatively geared property requires ongoing and additional funds from the investor, there must be strong capital growth to make the investment worthwhile. As mentioned earlier, property values don’t always rise in value, especially when prices are peaking or in areas where prices are already in the top bracket. This can place additional pressure and stress for the investor. When you negatively gear a property, make sure you have considered both the upside and the downside.

 

You can effectively time market cycles

We mentioned earlier in this article can the property market moves in cycles. Many people tend to think that you can effectively ‘time’ these cycles so that you always buy at the lowest point. This is a big misconception. Just like trading in the sharemarket, there is no reliable way of timing the market. You never know if the market is at its lowest point. But that doesn’t mean that you can’t evaluate your investment opportunities effectively.

Moreover, property markets are inherently local. Just because property prices are experience a plateau in Eastern Sydney doesn’t mean that the same type of property can’t be booming in Western Sydney. News outlets and media always refer to a Sydney property market or collectively as an Australian property market. But as individual investors, always think locally and evaluate your opportunities by knowing the neighbourhood you’re buying in. There’ll always be profitable sub-markets, but there will never be a reliable way to ‘time’ the bottom of any market or cycle.

 

It is best to buy near where you live

When considering your investments, it’s always an advantage to buy what you know. So why don’t you always buy near where you live? As active investors, research, due diligence and expanding your knowledge will always be your most valuable friend. The best investment opportunities don’t always pop up right where you live. However, property fundamentals are essentially the same where ever you look. In other words, the more places you look, the more opportunities you may find. The key property fundamentals that you should have in your toolkit include evaluating rental yield, vacancy rates, infrastructure, location, zoning, and demographic changes.

The real estate industry is naturally full of self-proclaimed experts. As with any investment, you should place less value on herd mentality and more value on individual thought. Property may be popular but it also has its fair share of traps. The truth is that strategy and research matters. If you’re starting out, jump onto RP Data or Realestate.com.au and look up some useful statistics. Best of luck to you!

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