We hear so many stories of mum and dad investors who have bought in the next “hot spot” only to find years later that they have gained no equity, or worse, the property has dropped in value. One area in particular where this has happened is all along the coast, where a decade ago we all thought you could never lose if you bought within a stone’s throw to a lovely beach.
So if you find yourself in this situation, what do you do? Do nothing: leave your money tied up in an investment property that isn’t performing? Wait until property prices rise again then try to pick the next peak of the cycle and then sell? Or take a hit: sell now for what you can then use the remaining equity to invest in an area that will make you money?
Of course, the right answer for you will depend on your circumstances. Maybe you can’t afford to sell. Maybe you get a good rental return despite the drop in value. Maybe your accountant will advise you that a capital loss can be used as part of a tax minimization strategy.
It seems to be in our DNA not to sell property at a loss but I want to challenge you to think about the opportunity cost of holding onto an underperforming asset. You could find yourself further ahead in five years if you sell something now that is likely to continue to under perform – cut your losses and buy something in a safer area instead that is likely to increase in value. And it could significantly reduce your personal stress levels.
I have an abiding love for property and hold great faith in it as an investment but you have to be careful as it is easy to do your dosh. This is why we caution all of our clients to be wary of the risks they take when buying property in unproven areas. In our opinion, if you are starting your investment portfolio, we advise you to be conservative and look for the best available property as close as possible to either Sydney’s or Melbourne’s CBD.
There are no shortcuts to making money in real estate. It will take you a number of years to acquire 2 or 3 quality properties in blue chip areas. Once you have a solid foundation and have built some equity, you can then start to consider taking some risk.
But this takes a different mindset – rather than being an investor, you will now be acting as a speculator. You will effectively be gambling that circumstances will change in a way that will result in a marked increase in property prices. Usually it takes a significant change in an area’s makeup for property prices to surge. I am talking about a major infrastructure improvement such as a new road or public transport system. Or a large employer with a long-term commitment moves into the area, such as a new mine opening. Another example would be a demographic change brought about by the redevelopment of public housing.
But these changes are not guaranteed, if they were, the prices would have already risen. There aren’t many people who make a windfall in a property transaction without taking risk. And the flipside of that risk is that the gamble may not pay off – that the anticipated improvements to the area never eventuate and that you end up with a property fizzer. And since property speculating is effectively gambling, the age-old adage applies: never gamble what you can’t afford to lose.
Published:- 20 July, 2012
Please note: 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.