Property Purchase Gone Wrong for First Investors, Just Because You Have Money, Doesn’t Mean…

In 1970, Perth’s median house price was $17,500. Let me just stop there right away and ask you all, “Who would want to would have lived in this era?”. In 2016 that median became $566,000. In NSW it was even crazier! In Sydney, 1970’s median was $18,700, and at 2016, that median became an eye-watering $1,124,000. Looking at this statistic, no wonder everyone wants to jump into the property bandwagon. A lot of people have this perception that property can make you wealthy. Sorry, let me rephrase that. Not just wealthy, but SUPER wealthy. I mean, some of the world’s richest billionaires were coming from real estate industry.

And I must admit, I, too am tempted to do the same. Even though I might not shoot for being a billionaire, but at least I live with the believe that property can somewhat help improving my financial situation a lot. Well, truth be known, yes it could have been – had I not just blindly gone with purchasing any property and hoping it would double in value. The problem is this: property investing is very much running a business. And to run a successful business what matters is the bottom line: profit. Or should I say: ROI – Return of Investment. No matter how good your product is or how good you think you are, if the bottom line is not realised, then you haven’t run a successful business. And unless we have that sort of mindset, our property investing is doomed to fail.

I used to think that a billionaire was just purchasing a footbal club for the sake of having fun. I mean, he’s got money, right? He could have just spent on whatever players he wants and does whatever he wants with the club. His business would have earned him money even faster than what he would have spent anyway, right? This is where I was wrong. A billionaire just doesn’t throw money away just because he can. He runs everything like a business. He has to get a return from his investments. Sure, the investment might not just money. It could be time or enjoyment. Either way, nobody throws money away for free.

Do you really think that someone who runs a non-profit organisation does it by throwing money away for free? Surely not! They have KPI to meet. They run it like a business. They have to measure the ROI, etc. Therefore, unless we think this way, we would never be successful in property investing, or in life in general I should say.

Without running things like a business, we would simply be wasting time!

So this is a case study of an investor property purchase gone wrong. I know someone who is very wealthy. One day, he chose to buy a property for $600,000 cash. The problem was, that property only rented for $450/week at the height of mining boom. I personally would have steered away from that property in the first place. Think about it… if you do a raw calculation, annual rental income is $450*52 = $23,400. Then if you divide this by $600,000 you get 3.9% yield, which in my opinion is a very-super-modest return! I mean, at the height of the mining boom interest was up to 10%+, so, had he put the money in the bank, it would have given him a lot more return than the property would.

“Well Tommy, you haven’t accounted for the capital growth”. True that. Fast forward few years later to 2018, the property is currently valued at $480,000. And, to add insult to injury, it is currently rented for $350/week. Sure, it is still a 4% yield, however, it’s a missing opportunity for him. He could have used the money to be invested somewhere else that would have given him better return on his investment. There is not much he can do at the moment other than just trying to keep the property and let it tick a long. And as the years go by, more maintenance needs to be made to the property, thus, more costs, meaning, less yield, etc etc etc.

Am I saying he made a wrong decision? Well no one had a crystal ball. He got cash, he took the risk. Who would knew that mining would go bust? What I’m saying though was the type of asset he purchased. The fact that it cost him $600,000 with only $450/week rent. That was the kind of property I would have avoided in the first place. But hey, the good news is, it’s all paid off. He’s got no mortgage on that meaning the situation wouldn’t have affected his personal life whatsoever.

But what about the rest of us, investors who might not have the same amount of capital as he does? What if we need to borrow money from the bank and yet our property keeps bleeding money? This kind of scenario is what would have added to our mortgage stress. All this highly negatively-geared, negatively-cashflowed property is what’s problematic. I know people who buy $1mil+ house as an investment. You can never recoup the cost on a purchase like this. There is only so much you can earn from rental income. And for a $1mil+ property, the interest + outgoing costs would have been a lot more than the rent income. Straight away, you’d be in the red.

I for one never bet on capital growth alone. It’s a risky preposition. And especially now with banks are tightening their lending, a lot of investors can’t access the equity anyway, nor can they sell the property. Market is slowing down and you’re only left with one option: that is to hold onto that money-sucking asset. And worse, if you borrow money from the bank and the bank reckons the valuation comes short, they can force you to sell your property and your other properties just to recoup their cost. This is how one lives under mortgage stress.

So, the take away from this is: just because you have money, you shouldn’t give it away just like that. Be vigilant as an investor, treat everything like a business. Can I invite you investors to talk to us before you purchase any investment property? We are confident we can give you a lot of insights and information so that you are minimising your investment risk as much as possible.