Property investing is definitely an excellent pathway to become financially independent. Think about it, the median price of a property in Sydney in 1970 was $18,700. In 2018 this figure has become $1,150,357! And will only continue to rise in the years to come.

However, owning a property is more than just solely looking at the capital gain numbers like above. There are a lot more things to consider such as holding costs, finding the right location to ensure capital growth, getting the right loan structure, protecting your assets, general day-to-day administration, cashflow and many others! To put it simply, investing in property is definitely not the “invest then sleep” process which a lot of people have been hoping to do.

There are a lot of costs involved in investing in properties both financially and psychologically. If you are not careful, you can have such an excellent investment property with high capital growth, only to leave you with no cashflow in your pocket and high mortgage stress. Life is more than just numbers while at the same time, we also need to plan for our future.

So, is property investing too good to be true then? The answer is: it is not as long as you plan and minimise the risk as much as you can.

The basic principle is quiet easy: you buy a property with high capital growth, hold then wait for it to increase in value. Then, you use the growth (called equity) to purchase more properties. And you keep accumulating that way. Or, you can accelerate the growth through renovation for example, where you can quickly add value to your property in the tens-of-thousands of dollars, if not, hundreds-of-thousands of dollars in a reasonably quick amount of time.

Or, you can also be a property developer. You buy a huge piece of land, subdivide them then build on each and sell the property, or just simply sell the individual land block.

All of the above sound very simple when you look at it from the “theory” perspective. They’re just theories. Let’s look at each individual scenario in closer details:

BUY THEN HOLD FOR CAPITAL GROWTH

Let’s say you buy a property worth $500,000. Without getting too technical with Lenders Mortgage Insurance (LMI) and all that, let’s assume you put in 20% deposit: $100,000.

You have other upfront costs such as stamp duty, settlement agent cost, etc that often sums up to 5% of the purchase price. Then, you have the holding cost such as interest rate payments, annual costs (water rate, land tax), property manager fees, insurances, etc.

“Oh but the property will double every 10 years, so all those costs would have been covered by the capital gain”. Is it really? If you use a simplistic view of the example we mentioned above about Sydney property price which median was $18,700 in 1970 to become $1mil+ in some 48 years later, sure, if you take the average, it’s $239,268 increase every year. The thing is, it doesn’t work that way, does it?

Throughout the years there will be demands, population growth, etc that will drive its prices up. However, until it happens, you still have to “hold” onto your property. And with all the holding costs, they will certainly affect your lifestyle at some point.

What if interest rate goes up? As you hold longer, the property will run down over the years, then you have all the extra costs of having to fix the broken water taps, leaking roof, etc. “Oh but we can rent the property out so renter can cover the holding cost”. True, but most of the time, the rent money will never cover the holding costs. What if you don’t have a renter?

Not to scare you, but what we’re saying is, we need to be aware of all these risks and don’t just take a blind eye believing what a lot of spruikers say about all the “positive” things property investing can be.

RENOVATION

Buy a super run-down property for $250,000 in an area where median price is $400,000 , then renovate its kitchen, change floors, etc which will cost extra $50,000. Few weeks later, after the renovation is done, sell it for $400,000. Pocket $50,000+ after tax. Perfect!

But it’s not that simple!

If you’re doing renovation, you can’t rent the property out. Therefore, you have to carry the burden of paying the full interest until the day you manage to sell it. You also have to be mindful of the potential renovation costs themselves. The more professionals you hire, the higher the costs. At some point, you have to do some of the renovation work yourself. If you work full time somewhere else, it would be very difficult.

“Ah, I can do it as a weekend job”. But it’s also the time that need to be spent with your partner and family. The longer your renovation project goes, the more costs you have to carry financially, physically and psychologically.

Then there are renovation money pits you really need to be careful of such as asbestos, damp, bad wiring, etc.

BE A SUB-DIVIDER OR BUILDER

Buy a big block of land, sub-divide them and sell each for a profit. All sounds good and well. Except, the price tag of this type of project is often in the millions of dollars! So, until they’re all “sell-able”, can you carry the burden of the interest payment?

Then not to mention having to deal with councils for approvals and regulations, etc. We knew someone who ended up having to sell all of his 8 investment properties just because the building project he was carrying didn’t get timely approval from the council and he had to keep paying for the interest.

Conclusion

We really don’t want to sound doom-and-gloom. All we want to express is, while property investing can provide pathway to financial freedom, at the same time we need to be careful of all the risks and try to minimise them as much as we can.

And this is only possible by doing a proper research and calculation prior to committing. We need to properly treat this as a business, because it is indeed, a business!

In the upcoming posts, we will be discussing the various strategies we can implement to minimise these risks.