Why investing in property isn’t set and forget
Many investors venture into the property market wanting to buy a property that will deliver high capital growth, high income returns, require little maintenance and effectively need little of their time and attention.
In other words, a ‘set and forget’ investment property that will make them wealthy, with little to no effort.
Do these exist in reality? I would suggest that for many, the answer is no and those investors who think they have purchased a set and forget property are blissfully unaware and/or ignorant of that fact.
Let’s consider the ramifications of the ‘set and forget’ mind set;
- to assume a property portfolio never needs to be reviewed regularly, is to assume that nothing will ever change in the suburb in which they have bought their property.
- assuming nothing will change, also means the investor is unlikely to have done thorough and in-depth research into the growth drivers that supported investing in that suburb in the first place.
- it also means they may not fully grasp the risks associated with the type of property they have bought and their own risk profile and
- it also indicates they have more than likely not received independent and unbiased property advice but so called ‘free advice’, which often isn’t good advice
Let’s look at the following real life example of how this can play out.
Julie and Kenneth were in their early 50s and decided they need to plan for retirement as their superannuation fund balances were inadequate.
Like many others, they didn’t seek professional advice regarding planning, investing or structuring from a qualified property adviser/buyer agent, accountant or financial planner. They also didn’t realise they were low risk profile investors.
They read some articles, attended a property seminar and decided on buying an apartment. They started looking in bayside Melbourne, specifically near St Kilda.
In 2009 they bought a one-bedroom apartment (off the plan) in a smallish group of 35 apartments in St Kilda East, after being told that St Kilda East was the next best place to buy for those who could not afford St Kilda. It would benefit from ‘ripple effect’ capital growth.
They paid $410,000, borrowing 100% plus costs, using their home as security for the property. They settled the property in 2010 and leased it out.
In late 2013, my in-depth portfolio analysis identified that the high rental property supply, low income, above average unemployment levels and potential for future oversupply of property, combined with low migration to the suburb would all contribute to retarding the opportunity for capital growth in the suburb. Based on these factors, this property showed little to no opportunity to outperform the average from a capital growth perspective over the longer term.
At that point, I appraised their property at $390,000, indicating a potential loss of $20,000 plus costs if they sold. Unable to reconcile the bad news, Julie and Kenneth elected to hold onto the property, effectively burying their heads in the sand.
In late 2015 Julie and Kenneth decided to sell the property. Their rent had been declining steadily each year due to the increasing supply of hundreds of new apartments being built in the area. This time, their property was appraised at $360,000 to $370,000, less than in 2013!
The ensuing auction campaign failed; however, the property did sell three weeks later for $355,000, resulting in a $55,000 equity loss plus costs, of which they had borrowed 100%.
The debt now needs to be repaid.
Considering the lost time (six years) and the opportunity cost had they invested successfully instead, the result is an estimated loss overall of over $100,000.
And they thought they had purchased a ‘set and forget’ investment property…
To avoid making these errors to begin with, you need to understand how to buy property that outperforms the market.
Some of the article content is extracted from the book Property Prosperity – 7 Steps to Buying Like an Expert by Miriam Sandkuhler © 2013, with the authors permission