Common Property Myths That Could Cost You Your Goals
We hear a lot of property investment myths here at Binvested HQ! We did a Myth Busters post a while back, but with more confusion than ever before about property investment, we thought it was time to bust some more!
Here are seven common property myths that we’d like to debunk once and for all.
Myth 1. You should buy negatively geared properties so you don’t have to pay as much tax.
It seems like the majority of the population think this is the only way to invest in property.
In fact, out of the 25 million people who call Australia home, only 18,000 or so have six or more properties. Let’s face it – it would be pretty hard to buy more than two or three if you have to pay for them out of your salary each week.
To Nathan Birch, who has well over 200 properties in his portfolio, this does not make sense. He treats property investing as a business.
“Any successful business collapses if it’s got losses,” he says.
“You need to treat your property investing like a business.”
He says negative gearing comes with greater risk. If you find yourself out of work or with extra expenses, it may not be possible to hold onto the property.
“The reason I like neutral cash flow properties is due to the fact that you’re minimising risk along the way as the property is looking after itself.”
He says buying negatively geared properties limits how far you can go on your property journey.
“You can only hold a certain amount of negatively geared properties before you have got no income.”
Instead of buying a couple of properties to reduce your tax bill, it is possible to build a whole portfolio of neutral cash flow properties that will pay themselves off. As rents go up, a neutral cash flow will become positive, creating a passive income stream that you didn’t need to slave for in the first place.
Myth 2. You can’t service for more than three properties.
“You can’t service for more than three properties if you buy negatively geared properties,” says Nathan.
But, if you have neutral cash flow properties, then it’s a different story.
“A lot of people get stuck with servicing because they’re buying the wrong properties in their portfolio.”
They also get stuck because they don’t have a good strategy in place that is based on solid research and planning, he says.
He says a property portfolio is like a jigsaw puzzle.
“If you are missing pieces of the jigsaw puzzle then you are going to get stuck and you can’t create the whole picture.”
“You need to get the right acquisitions and have the right strategy in place.”
Like a jigsaw, it also helps if you fit together each piece in a certain order. Structuring your finance correctly from the start can give you more mileage on your investing journey.
Myth 3. You should only buy properties that are close to amenities and train stations, etc.
“I’ve made tens of millions of dollars from properties of my own that aren’t near a train line or aren’t near a shopping centre,” Nathan says.
In fact, Nathan actually prefers to be further away from train stations as this can mean a better demographic.
“A lot of people focus on the irrelevant things,” he says.
“As you build a property portfolio you need to focus on the numbers and focus on what that property is going to do for you.”
He says, it is important to assess whether there is a market to rent to, if there is potential for growth and whether you can buy it below market value.
Plus, buying in the city means there are always amenities nearby – even if there is no train line in the area.
Myth 4. I should wait to buy a property because prices will go down further.
Over the last 15 years of his investing, Nathan says he made his best purchases during times where buyers are fearful.
“A lot of people tune into the media and buy into the hype or the negativity.”
“But, I made my greatest amount of wealth during the GFC.”
He loves the 2018 to 2019 market because it is a buyers’ market.
“People are sitting on the sidelines. They can’t obtain finance.”
“It is going to be harder for people to buy properties which means that there are greater opportunities to take out bargains.”
But, he says that these times aren’t going to last forever. As more money is printed to cope with the liquidity squeeze, cash will be worth less and assets will rise in value.
He says this phrase sums it up:
“Poor people focus on cash, money and salary whereas rich people focus on controlling assets and net worth position.”
Not only is now a good time to buy, it is also a good time to negotiate a bargain.
Myth 5. I can’t get into property unless I have a $200,000 deposit.
This may be true if you want to buy your dream property straight away, says Nathan, but there are plenty of properties out there that are much more affordable.
“You can still get into properties in capital cities – even Sydney, for $300,000.”
In some capital cities, it is even possible to buy for as little as $150,000, he says.
A 20% deposit would only be $30,000 for a property this price.
Nathan didn’t buy his dream home when he started investing. He bought a termite infested property in Mt Druitt because he could afford it and he could see that the market had potential for growth.
He saw property as a good vehicle that would enable him to buy a dream home later down the track.
“A lot of the Gen Y investors who I help out get six or seven properties in their portfolio first.”
“Then they get the ability to buy their dream home – because they have structured things correctly.”
Myth 6. It’s better to get a principal and interest loan and pay down the debt as quickly as possible.
For Nathan, the ability to hold more assets throughout a market cycle is more important that paying down debt quicker.
“With an interest only loan, a lot of people think that you never pay off the house.”
“But what you want to do as an investor is not just to save a few dollars on interest.”
“You want to build assets and increase your net worth position.”
He says, if you are paying both interest and principal repayments from the start, it will burden your cash flow. This will affect your ability to buy more properties.
The more properties you hold throughout a market cycle, the greater your gains will be.
Nathan prefers interest only loans. Once the interest only period reverts to principal and interest after five years or so, the rents have gone up enough to cover the extra mortgage cost.
He says, by buying more now and leveraging your debt well, it is possible to build a better net worth position and let inflated rents pay off the debt.
Myth 7. As long as I get a preapproval my loan is in the bag.
In the current lending environment, a loan preapproval is not a guarantee. Banks are being pretty tough with their lending requirements and may not take on the security for certain reasons – even if they agree in principle that you can service the debt.
“Gone are the days of getting a preapproval and she’ll be right,” says Nathan.
“It’s not approved until it’s formally approved.”
He says he has come across a lot of people who have lost deposits because they weren’t approved at the time of purchase.
Nathan recommends going through a broker rather than a bank. This means you will have access to other options if your preapproval falls through.
Now that you know the truth, you can take action!
Remember – it doesn’t matter how big the step, so long as it’s in the right direction.
If you need help taking the next step on your property journey, please reach out and we’ll do what we can to get you to where you want to be!