Smart.Happy.Money 23: Is this the end of property as we know it?
Unless you have been living under a rock without a TV or internet, you have heard that the Australian property market is falling. At the time of writing this, Melbourne (my town) has fallen just under 10% year on year. So, what does this mean? Is that it for property in Australia? Is it still worth investing?
Firstly, let’s look at property investing.
Australians love property investing. It is one of the most popular ways for people to grow their wealth. Why is this? Well, I think that Aussies love to be able to touch and feel their investment. A bricks and mortar property investment is easy to comprehend whereas a diversified portfolio of shares, ETF’s and cash investments can seem daunting.
We have also watched as our parents created wealth through owning a property or property investing. Many people rely on the value of their owner-occupied home to pay for retirement or age care. I deal with clients in that position all the time, it is their greatest asset.
So, let’s agree that Aussies have a thirst for property, and that has helped to fuel skyrocketing prices. Even with the latest downturn in price, Melbourne’s property market is way up over a 5-year period.
We have to ask ourselves the question… Is property still a good investment?
Well, I am going to propose to you that a property investment is less about the capital growth over time and more about the income derived along the way. By switching your thinking about this you will find that there is never a good or bad time to invest in property, only good and bad deals.
Let’s imagine for a minute that you decide to get into the carrot business. You borrow funds from a bank and purchase 10 tonnes of carrot seeds. What do you do next? Would you ever, in your wildest dreams, think that it would be OK to hold on to those seeds on the chance that 10 years down the track, someone will buy them off you for more than what you paid? Not a chance, that is no way to run a business. You would plant them, nurture them and sell the end product to create a revenue stream.
Holding on to your carrot seeds is like buying property to make a capital gain. You are hoping, wishing that the market only goes up (which it doesn’t) and that someone at the end of the day is willing to buy your asset off you. There are a few problems with this, here they are.
You cannot control the property market. It is completely out of your hands. It doesn’t matter how clever you are, markets are markets and timing them is next to impossible.
You have costs to hold the property each year. These add up and need to be repaid, plus the original purchase price, plus the extra return you are looking for.
Small changes to your cash flow can affect your ability to keep this strategy going, meaning that you may need to bail out at a bad time.
So how do you grow your carrots, I mean property wealth? You treat property investment as a business. A business has to produce cash flow and that is determined at the time of purchase.
Anytime you are looking at a property deal you are in the driver’s seat. You can figure out how much income the property will produce, you will know your costs to hold the property and you can see if it is positively geared (making money) or negatively geared (losing money).
At that point you can decide whether you would like to invest or not. The craziness of the market barely gets a thought. You are in control, you are not leaving the success or failure of your investment up to the volatility of the property market.
Thinking of property this way also changes the type of property you might look at. Rather than searching for the suburb that is going to have big capital growth (which is always a guess) and paying a higher amount to purchase a property in that suburb (so called ‘blue chip suburbs have already seen lots of growth and are expensive to buy into) and then receiving a lower rate of return (It’s hard to charge rents at 5% if the property is worth 1.2 million) you look for properties that will return a greater amount of income. These properties may be more rural or in new, up and coming suburbs. You may even be lucky enough to get two properties like this for the same amount as one in a so called ‘blue chip’ suburb.
It’s never a bad time to invest, it always comes down to the deal that is being offered.
Want some help with property investing? PIGProperty, the property investor group can help you from your initial enquiry, property search, purchase, settlement and management. Plus, there are heaps of education tools, e-books and more.
You can find out more about PIGProperty by clicking the PIG.
Until next time, let’s save, invest and grow.
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Ben Graham-Nellor is an advisor, coach, blogger and speaker who has worked in the financial services industry for over 15 years. He believes that by educating and advising people today, they can improve their tomorrow.
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