It may seem odd to hear me say this but there are some seriously good reasons not to buy a property.
Recently I was listening to one of my old pal Bryce’s podcasts and it got me thinking about this. Bryce Holdaway and his business partner Ben Kingsley chew the fat weekly on The Property Couch and give loads of excellent advice for property investors. The podcast I am referring to here was on this very topic: Podcast – Reasons NOT to buy a property.
The guys talk through a number of reasons not to buy a property and I wholeheartedly agree with them all! Most come down to false expectations, misconceptions and not fully appreciating the risks.
1. Because you want to pay less tax.
If the only reason you are buying an investment property is because your accountant says you are paying too much tax, then consider this: you could be spending $1 just to save up to 49c. Put simply, this is a false economy.
Chasing depreciation benefits cause many buyers to ignore the fundamentals of property investment: they often overpay for brand new stock that has no risk-reducing history to judge it by and limited capital growth prospects.
2. If you have a lack of understanding or knowledge of the fundamentals of property investment.
Many people think that they understand property simply because they live in one and yet there is so much more to it. This knowledge gap makes you vulnerable to bad advice. Or you might think you are playing a safe game by buying in the same suburb in which you live because it’s what you know. Either way, you would be missing out on real investment opportunities because of your own limitations.
3. Because you are suffering FOMO.
Are you are panicking because you are seeing rapid price rises and feel like you need to get on the bandwagon? Beware: too many people end up buying crap and paying too much for the privilege.
Property spruikers thrive in a booming real estate market, where unsophisticated purchasers suffer FOMO and fall for alluring sales pitches like “guaranteed rental yields” and “below market value deals”. The only thing you are missing out on here is a bullet you would be better off dodging.
4. If you fear debt.
Does the idea of owing hundreds of thousands (or even a million) of dollars keep you awake at night? Then property investment is probably not for you. The reality is that you need debt in order to leverage your property investment.
People who fear debt will often do one of two things if they go ahead and buy: make themselves sick with stress, or look for something cheap. If you go the cheap option you will probably buy an underperforming asset, which is self-defeating.
5. If you are cavalier with debt.
The flip side to a fear of debt is that you don’t respect debt enough and take too many risks. We see this with investors who favor quantity over quality.
6. If you want the property to serve more than one purpose.
If you are buying for investment and also want to cover future options of what “might happen” you are probably wanting one property to do too much.
For instance, buying a coastal property now for your retirement. Things change and future lifestyle choices may never come off. If you buy in a high capital growth area now for pure investment, down the track when you are ready for your tree or sea change, you will have options at your disposal that you would not have had if you choose your location now. The capital growth in regional areas simply won’t keep up with Sydney.
Or if you are thinking that you want an investment for now but one of your kids might live in it if they go to university, you might be limiting the location in which you search. A great opportunity may miss your attention because you are focused on a future that may never happen as you picture it.
7. If your finances are not in order.
You need to have good cash flow available to support a quality investment property. With the recent price growth in Sydney and Melbourne, rents have simply not kept up, and even with record low-interest rates you will need to fund the monthly shortfall if you borrow a large proportion of the purchase price. Not only that, but you need to be able to withstand future interest rate rises, as they are sure to come at some point.
Another aspect of having your finances in order is that you will be able to act quickly should you see an opportunity to buy a quality property at a reasonable price. Delays can cost you money because they give other buyers an opportunity to compete with you.
8. If you can’t afford quality.
So many buyers fail to appreciate that not all property performs the same over time. A quality property will grow in value at a higher rate than the median growth for its suburb. And a quality location will perform better than an inferior location. Combine these two elements and you have the formula for a successful investment. But if you can’t afford quality there are other, less risky, investment vehicles that will probably serve you a hell of a lot better over time. This is probably my favourite out of all of the reasons not to buy a property.
9. Because you want to get rich quick.
This is a dream many have, but property investment is simply not the vehicle for it. You might luck it – and if you do, pocket the wins and don’t try it again, because this is gambling, not investing. Property investment is for the long-term – slow and steady wins the race. And if you think that property development is the way to make your millions – realise that this is a job, not an investment strategy. Renovation returns are simply not guaranteed and there is high risk, which means you can just as easily make great losses.
Now, I have enormous faith in the benefits of judicious investment in property and I have put my own money where my mouth is here. But it’s not for everybody and I hope I have convinced you that there are several good reasons not to buy a property. I sincerely do want to scare you off property investment if your expectations are off-kilter: the risks are simply too great.
Published: 15 November 2016
DISCLAIMER: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.