How do you make a $200,000 mistake in Property?
So how do you make a $200,000 mistake in investing in property? Well, its quite easy really if you don’t do the right preparation and the right planning work. Let’s look at this example:
Let’s say you have a $500,000 property and because you’ve done your homework and you’ve done your numbers, you think that’s all you can afford. But in reality, if you study your cash flows, you look at your equity position and you adopt some really great tactical and strategical planning — let’s say you can actually buy a property worth $600,000. Now let’s assume that those 2 properties, grow in value by 7.5% compounding over 10 years.
The difference in 10 years is $206,000.
Now that’s a wealth position that I’m sure most Australian household would be happy to take. But it is not as simple as that.
The other risk on the other side is also quite important to understand. Let’s assume you did buy that $600,000 property and, in fact, you couldn’t hold on to the property for longer than 3 years because your household circumstances change. In other words, you stretched yourself beyond your capacity, which is a danger. So in 3 years time, you’ve had to sell the property and you potentially realise a loss because the interest of holding that property for 3 years plus the acquisition cost in terms of stamp duty and the selling cost could mean that even if the property has gone up by a $100,000 there are more costs associated with holding that property, so it hasn’t had enough time to grow in value to realise that gain.
In one way, you are making a loss because you’ve gone too aggressive; but in another way, you’ve made a loss financially, especially in terms of building your wealth, because you didn’t take advice and you didn’t plan.
So what’s the best move?
The best move is to sit down with a professional advisor to understand your cash flow, both today and tomorrow. They will be able to work out what you can comfortably afford now, and make sure you get a premium return because you are working out the best possible value your household can afford to take you forward. I mean, it’s no good in buying $300,000 or $400,000 property if you can buy $600,000 or $700,000 properties. It’s about understanding this and understanding asset selection. So if you want to make a $200,000 property mistake just by doing back of envelope calculations or taking a guess at what’s possible, then that is up to you; to ruin or to potentially jeopardise your wealth for your household. In our view, we want you to come in, sit down, take a measured approach, do the cash flow modelling and get the best possible advice through sensible planning to see you achieve your maximum returns.
Thanks for watching.