Gambling on Capital Growth
?? 1-MIN #PROPERTY READING: The basic premise of investing (of whichever form, can be property, shares, commodities, etc) is for our money to perform better than inflation rate. Property in the long run (we are talking 15 years+) has shown around 8% average annual growth. The “Rule of 72” states that property generally doubles in value within 8-10 years. The keyword here is “in the long run”.
I still remembered when I was little, back in Indonesia my parents have always told me the stories how they owned a piece of land close to the CBD and now the price has gone up by 10 times, if not more. And I’m sure many of you have heard similar stories.
Because of this, many people are drawn into property investing, me included. The issue I’m having however (speaking from my own experience), is that when we put our faith solely on this “buy property because value will always go up” principle, it makes us think that buying any property will do. Just buy anything…property price will go up and you will accumulate wealth.
The problem is, it ain’t that simple. Holding an investment property is expensive. There are ongoing costs such as water rates, council rates, maintenance, property manager fees, vacancy rates, etc. And what I have seen many many times (which I have also fallen into the same trap in the past), is that Investors buy all these expensive properties (which rental yield is very low), believing that value will eventually go up. Meanwhile, their cashflow is way in the red. All it takes is a job loss or reduced income, or vacant property and these Investors will be forced to sell early.
If you can hold onto your property for 15 years+ you will win, guaranteed. It is when you have to sell early will you lose. This is why relying purely on natural capital growth is a risky preposition. I have seen people buying $1mil property that rents for $500/week, or $500k property that rents for $380/week. Don’t get me wrong, if you have cash, by all means. But if you have to borrow money from the bank with 80-90% leverage, this is when it gets risky.
So, this reality has changed my mindset when it comes to property investing. Instead of purely relying on natural capital growth, what if I create that growth myself either through below market purchase, renovate and value add? Or, if I want to go for natural capital growth, I might choose a super high yield property that can pay for itself instead.
Maybe I can buy 3-4 cheap super high-yield property that is positively geared, and because I am earning income from these properties, I can then offset it with a medium-up valued property on negative gear. That way, I spread out my investments. The medium-up valued property should be more stable in price and has better natural capital growth.
Remember, relying on natural capital growth solely is gambling! If you want to go for a safer investment, you can consider what I have purchased for my clients: $415k property, spent $130k on renovation, sold for $670k. Or, buy a $148k 4×1 green-title property which was previously purchased by the owner at the height of market for $296k. Currently rented for $240/week. This is how you create wealth through capital growth.
