8 Reasons Why People Pay Too Much For Investment Property
Nathan Birch, co-founder of Binvested.com.au, reveals how property buyers are duped into paying more for their investments.
One of the biggest mistakes homebuyers and investors make in Australia is to pay too much for property.
It is a common misconception that in order to get into the current property market, you need to be prepared to pay more than a property is worth. Big mistake. If you want to make money on property, you need to pay less than the property is worth – not more.
Many scoff at the idea of buying Australian property below market value in the current housing climate, but it is not impossible. Paying too much for property is not inevitable, it is a choice – and a bad one at that.
Here are eight of the most common reasons why people in Australia pay too much for property.
1. They buy on emotions
Investors make this mistake time and time again. Instead of treating their investments like a business and buying based on the logic of a good deal, they imagine themselves living in the property and become attached to it.
If you want to make money on an investment property, look at the numbers and not the décor. Don’t allow yourself to make hasty decisions from fear of missing out.
2. They buy off the plan
Off the plan properties make money for developers, not for investors. Marketing costs such as showrooms, staff and glossy brochures, are covered in the purchase price. The salesperson’s commission – often as high as 10 per cent – is also covered in the purchase price.
Even “guaranteed rent” can be covered in the purchase price. This means you are paying way more than the property is actually worth.
Your deposit is then held captive until the date of settlement. This could take years. By then the property may be worth less than what you agreed to pay, making it difficult to gain enough finance to settle. This means you must either come up with enough cash to cover the shortfall on an overpriced property, or lose your deposit.
3. They don’t do their research
A lot of buyers are short-sighted. They think that because the market has accelerated over the past five years, this will always be the case. Markets operate in cycles – they peak and they trough. For example, the Sydney market went backwards between 2003 and 2009 before it came back with a vengeance.
Research into different markets can help you know the best time to buy. Don’t pay big and buy when the market is at its peak. Buy when the market is low and at the start of an upwards climb.
4. They have no plan
Many investors try to fluke it. They don’t have a well-thought out strategy in place to guide them on the right path for their purchasing. How many businesses have become successful by acting blindly and hoping for a positive outcome?
Property investors should do tireless research, find the best team of professionals, consult their financial advisors and come up with an investing strategy that will enable them to achieve their goals.
Make sure you purchase properties that are in line with your strategy, that are below market value, have a good upside for growth and a neutral to positive cash flow.
5. They don’t use property to their advantage
A lot of first homebuyers whinge about being locked out of the market due to housing affordability. Others who can barely afford it buy their family home and spend the next 30 years working hard to pay it off.
Instead of slaving to pay off an excessive mortgage, buyers could consider purchasing affordable investment properties as part of an overall strategy to build wealth. This may help them to purchase their dream house further down the track, while having an asset base to bolster financial security.
6. They get sucked into ‘private auctions’
Real estate agents will often play buyers against each other in a last ditch attempt to raise the purchase price before the contract has been signed. It usually works.
Buyers who have formed an emotional attachment fear missing out – so, they agree to pay more. This is where emotion can be the biggest killer. It happens at public auctions too, but at least then you know the real estate agent isn’t lying.
Try to stay focused on the numbers and your bottom line when buying properties. You may love the place, but is it really worth sacrificing your cash flow in order to buy it?
7. They buy in order to negatively gear
Negative gearing is a tax right off, not an investment strategy. If you want to build wealth through investing, using your own cash to hold one or two properties in the hope they will go up in value simply won’t cut it.
Building a portfolio of neutral to positive cash flow properties that are located in metropolitan areas with a good upside for growth will help you build wealth in equity without sacrificing your bottom line.
Say, for example, you purchased 10 neutral cash flow properties that doubled in value over five to 10 years. You could sell half in order to pay off the remaining five, and earn more than $90,000 a year in passive income (five properties rented at $350 a week will earn $91,000 a year).
8. They don’t do a cash flow analysis
A lot of investors think they are buying a neutral or positive cash flow property, but end up out of pocket each month.
Make sure you calculate all of the costs involved, such as council rates, utilities, insurance, repairs and maintenance and mortgage repayments.
Factor in higher interest rates so you can identify any possibility that cash flow may turn negative. It is also important to be realistic about how much rent you can charge.