Every 2 weeks or so it is not unusual for us to get a call from a client asking if investment property is a good investment. Even in this uncertain market.
The question normally comes about because they have been on a property seminar which promised they will make trillions. Or they have been speaking to friends who have told them that they have made eleventy billion dollars on the property market.
And usually I sigh. Yes, there has been money made in investing in property and I have invested myself. I just wish those seminars and all our friends would just be clear on how much money can be made.
And I know this because when Trillions or Eleventy Billion is promised but you only end up with what is in your piggy bank it can be a bit deflating.
So, what is the reality?
Well for starters friends of yours have not taken into consideration the full cost of owning property such as mortgage fees, mortgage interest, stamp duty costs and legal costs to name a few. None will tell you that there are times when the property is empty generating no money or that their tenants tried to set fire to the decking (this is a true story btw). And none will ever take into consideration the new kitchen that was needed because the last one was built in 1975 or remember when the mice in the attic decided electrical wiring would make a good meal. These are all costs that need to be taken into consideration before you work out how much you have made in price increases.
Ahh but you say what about the property that is negatively geared? They will argue its good for tax. Maybe. But it is usually bad for cashflow because if the property is operating at a loss it means you are spending more than receiving even after taxes. It’s bad for your pocket. You are losing cash now in the hope that in the future when you sell you will get more. This is known as holding costs and never do friends or seminar presenters calculate this figure when working out the increase in property values.
As for those property seminars? Well they do like their graphs and tables which always show you will be a muti-owner, trillionaire within a few years, living on a boat Tom Cruise would approve of.
But that leaves a question. If that is the case, why is the ocean not full of property owners worth trillions in boats? Something does not add up.
Property seminars have one strategy. Buy many properties via them (because, they will tell you, they have the experts to find you the best deals) and use equity and borrowing to buy more – ie use leverage.
And maximum leverage is the way to go according to them. This means you borrow to buy property and never repay the loan. As the property increases in value you keep borrowing this increase to use as a deposit on your next purchase. And by doing this my client was told they would make over $6m dollars over a 30 year period and own several properties.
WOW! that’s impressive.
Here’s the problem.
After 30 years my client would be 77 years old with a mortgage of approximately $2million. I have never met anyone aged 77 who wants to have a $2m mortgage over their head. And in order to repay loans you have to sell properties which kind of defeats the purpose. And none of them ever mentions state property taxes for owning multiple properties which you pay EVERY YEAR. Or capital gains tax when you sell (and you will have to sell otherwise you cannot pay off loans). And over that time the seminar talker walks away with a ton of your money to ‘investment advice’, commissions and other kick backs.
Remember if you have to sell a property or an asset to live you are selling out of a property. That is not wealth building. That is cashing out.
Wealth building is when you buy an asset, pay off any debt associated with over time and then use the income it generates to live your life. That’s the way real wealthy people do it.
Yes, property can be a good investment. Do not assume you will always make money on property. But when it comes to investments you should spread it around a bit. If an advisor tells you to put it just in property (and specifically with them) then that is not great advice.
We have written a detailed Property Guide on purchasing investment property. If you would like a free copy click here