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Empower Wealth Blog post by Empower Wealth

Seven Property Investment Myths Keeping You From Growing

Investing in property can be a bit frightening if you are unfamiliar with what it entails. When considering it, realise that properties can generally be categorised into two groups: active or passive investments. Active investment requires the investors to be on the run and this could be buying a house, fixing it up and then selling it for a profit. Passive investment on the other hand would typically include purchasing apartments or houses to be rental properties and get the ongoing stream of income and growth in the value over time.

Whichever strategy you are going for, deciding to invest in property can still be intimidating especially when everyone else seems to have plenty of cash to throw around. Even then, it isn’t usually the cash that keep people from getting started. People are hesitating because of the various ideas frequently thrown around about property investment which are mostly just myths.

Here is a look at seven common myths and why they shouldn’t keep you from growing your property portfolio.

 

  1. You need a lot of money to get started.

Just because your property-investor friend has a lot of cash now, it doesn’t mean he or she started out that way. Purchasing a house on a full block certainly would cost a lot, but you can start with much smaller investments, such as townhouses, units and apartments. When you start earning income from these investments, you’ll have more money to finance others. On top of that, if you pick the right asset at the right location at the right time, the property would appreciate in a few years’ time which translates to more equity to fund your next purchase.

You don’t need a large savings account initially, either. If you are just getting started, you can benefit from the equity in your home. If you have significant equity and have made timely payments, you may be eligible for a loan to make a new house or apartment purchase. Owning another asset may provide a tax advantage, thus extra cash, as well.

 

  1. Buying purely for a Negative Gear (Tax benefits).

Negative gearing is owning a rental property that generates less income than it costs to possess it. As a result, the negative income can be treated as a tax loss which can offset other income, which has had tax paid. The hope with negative gearing is that over time the asset will grow in value, and as it grows, so will the rental income. But this is not always the case. Nobody should ever invest with the idea that running an asset at a loss is a smart investment. Instead, the property asset should be bought with the view that the long term growth and income will justify the short term lost (and if applicable, losses).

Instead of just focusing on the tax benefits, buying an investment property should be more about the long term performance and how it fits in with your cash flow position. Some household works well with negative gearing as an ancillary benefit because of the high liquidity of their cash flow but some others might require a positive gearing investment.

 

  1. It takes too much time.

While you may not be a real estate expert, you probably intuitively know quite a bit. To start, spend your Saturdays attending open houses instead of watching football on television. Take some time to peruse the Internet for expert advice instead of searching celebrity news. Visit your local book store and read up on how to get into property investment.

It is true there is no quick way to make a buck, at least not a sustainable one, and anyone who promises such a deal is going to be the only one making a buck. But if you put in a little time, and get educated about investment prospects, you can see significant results. Is it true that this researching can take months if not years and it may take up another couple of years to see if you’ve made the right decision, but sitting on the couch doesn’t bring in much cash either.

If you are time poor or is not confident with your research then the other option is to visit with a Qualified Property Investment Adviser (QPIA). With their formal qualifications in property investing and experience, they would be able to understand your financial position and advise you the type of strategy and property that you should go for. None of these things requires an immediate commitment such as buying a property instantly. Sometimes, a QPIA might even advise you to save for a little while more but at least you can be rest assured that you are on your way to realising your investment potential.

 

  1. All property values go up or it’s a bad deal.

Perhaps one of the most commonly heard myths is that property values will always increase. This cannot be more wrong in the Australian Property Market. Land and housing are not immune to downturns, at least not in the short term. When investing, you need to take into account many factors when deciding if it is going to pay off for you. Are you in it for the long haul or are you just trying to flip it?

When you consider a purchase, take a look at its initial acquisition cost as well as ongoing maintenance costs such as management fees, regular maintenance and potential upgrading cost. Then contrast that with possible rental income now, as well as possible future increases. Look at your surroundings to find indication of rental demand increasing; is there a school nearby? Will there be a potential development in the area? What kind of lifestyle drivers are there that would push up the value of the property? Taking into account these differing costs and factors, the price may outweigh the possible return on the investment, or it may highlight a great potential for growth.

Keep in mind that worrying too much about numbers can also rob you of possible opportunities. While others fret over inflation or unemployment rates, you’ll have less competition and can take advantage of lower buying prices. By thinking creatively, you can ignore any stock market downturn and instead see your long-term real estate values increase.

Over the long haul, real estate is still considered one of the lower risk investments out there. Despite some market correction and periodic drops in value, the property market in general does tend to steadily increase over time. It may just take longer sometimes. You also have the assurance that decisions regarding the property can be made by you. In a way, you can control its market value with a kitchen upgrade and sometimes even just a fresh paint will the job. In contrast, an investment such as the stock market can be quite volatile, and you have no direct control over it.

 

  1. There’s nothing affordable left to buy.

When the market is booming, it seems everyone is jumping on the bandwagon and eating up the great deals. Then, when the market is slowing, it seems downright dangerous to dive in. But just as your mother always said, “You don’t have to do what everyone else is doing.”

When your finances are in order and you feel ready to invest, do it. If you simply wait for a perfect deal to fall into your lap, you probably won’t see much result. If you really want to get started, going out and talking to someone will likely bring better dividends.

Never forget that so-called bargains may be just the opposite. There is no such thing as a free lunch in this world. If a developer is selling a property for an unbelievable deal, there’s usually a good reason. Take a look at possible motives for selling short. You may want to consult with an expert to determine if you’re being offered a great below-market deal or if you’re being fleeced. You want something with sustainable performance, not just something cheap that would give you grieves down the road.

 

  1. You should only buy in locations where you are familiar with.

While it may sound smart, only investing in properties in location that you know can leave you out in the cold. The best performers are those that fit the market they were designed to meet and this might not be in your geography dictionary.

When you look at the Australian Property Market, you shouldn’t generalise the performance of a property across Australia or just at state or city levels. There are submarket in each market! In fact, there are different pockets in each suburb. The value of a property in one street can differ greatly from a similar property in the next street. So if you live in Melbourne and personally you find it a great place to live because it was awarded The Most Livable City in the world it does not necessarily meant that it would be a profitable place or time to invest. The Melbourne market might have moved and going into the market at the wrong time could mean buying the property at a premium price.

Instead of just finding investment potentials in the 10 suburbs that you are familiar with, the best investment returns can be in another suburb or another state. The priority is not to find an investment that you can regularly look at but instead, an investment that would generate the best returns that you are hoping to get. So if you are ready to invest but can’t find opportunities in your area, why not get on a plane and look for them elsewhere? If you are unsure on how to do that, get a professional that will do so for you.

 

  1. Only blue-chip suburbs will make you money.

We cannot emphasize enough the importance of buying in the right location. A very basic way of explaining is; you can always renovate a property but you can never move it. Having said that, you don’t need to be looking solely at high-income neighbourhoods. Depending on what strategy suits your financial goals, it may be easier to make money in less affluent suburbs.
Ben Kingsley, our CEO and Founder and the chair of Property Investment Professionals of Australia (PIPA) has said that while buying in a blue-chip suburbs has its many investment benefits, buying in an area with a growing income level can be equally attractive. Not only will you be able to find a larger leap in your rental yield, the capital growth can be astounding as well. But similar to any type of investment, the key is to find the right area that ticks all the boxes and the only way to do that is by thorough research, keen observation, an analytical assessment and last but not least, independent property investment advice.
Remember, you don’t need to look for what is the cheapest, but for something that is a good value.

 

It can be difficult to decide whether property investment is right for you. Before pushing the notion away, bear in mind that many of the reasons against it are really just myths. Investing can bring returns, although it may take some time to turn a profit. If you are nervous about trying it alone, contact a qualified property investment adviser. He or she will know what pitfalls to avoid, and what can work best with your financial plans.

You can also book a free one hour appointment with us. It’s a no-obligation appointment and we are more than happy to be able to assist you in your property investment journey. Simply fill in the form at the top right corner to get started. Alternatively, you can also join our Free Property Webinar to learn about investing in property and more!

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