Four property investment myths – BUSTED!
Property is one of our favourite topics of discussion. Conversations and debates over whether the market is rising or falling, what the best strategy is, where the next hot spots are and so on are endless.
So are the myths. Here are four of the most common I hear and why I think they’re bogus!
MYTH #1: You should buy your own home first
Australians have a love affair with home ownership of the owner occupying kind. To own (or, partially own) your own home is still viewed by society as one of the key milestones of success, of having it ‘sorted’.
Unfortunately, many of us are blind to the financial impact and consequences that can come with purchasing a home as your first property. The decision to own and occupy first can weaken your financial position and servicing ability with banks, and increase your cost of living. More often than not, you will also find you have to live in an area that does not tick all your boxes because you can’t afford to buy elsewhere.
In the vast majority of situations, it is going to cost you more to own your own home than to rent. If you want to accelerate wealth creation (and get that dream home quicker), the best approach is to keep your living expenses as low as possible while you establish your investment portfolio; monthly mortgage payments on your PPOR will only hinder your borrowing capacity and slow your ability to grow a portfolio. Continue renting or live with family and resist non-essential spending while you improve your financial position.
If you had the choice of purchasing your dream home in five years, or a poor quality, badly located home now – wouldn’t you wait?
MYTH #2: Invest because it will save you tax
Investing in property to save on tax is absolutely NOT the right approach to property investment in my opinion. In fact, this is not ‘investing’ at all.
Your reason for investing must be to make money – not lose it! Negative gearing is acceptable if you’re confident the average annual capital gains your investment will deliver will sufficiently outweigh what it costs you each year to hold the property.
Until you realise your capital gains by selling, or your property eventually becomes positively geared, you will actually be losing money every month as you dip into your own pocket to meet your loan payments.
Invest for returns and returns only. And if you are negative gearing, you must make sure you’re invested in a market with strong long term growth drivers.
MYTH #3: Debt is bad
‘Debt is bad’ is another stigma still prevalent in our society which hasn’t been helped by the GFC. There are many advocates of buying a home and paying it off before you out your money anywhere else. This isn’t the wrong approach, it’s just not conducive to efficient and swift wealth creation.
There’s not just one kind of debt – there’s good debt and there’s bad debt. It’s important to know the difference and how good debt – understanding how to use debt effectively and safely – can see your wealth creation goals realised a lot sooner.
What’s ‘good debt’? It’s using the power of gearing to maximise returns while staying within your financial limits. There’s a reason interest-only loans are popular with investors. You can secure a high value asset with minimum outgoings, while taking all the return.
Using equity from existing assets also allows you to build your portfolio quicker without affecting your cash flow. Multiple properties means multiple capital growth and cash flow opportunities. This means, with smart investing, you will be able to pay down the debt on your home a lot quicker than if you were relying on your salary alone.
MYTH #4: Making money from property is a sure thing
Unfortunately it’s not. This belief is driven by Australia’s historical trend – but as we all know, not everyone that has invested in property has a positive story to tell.
A rising macro market doesn’t mean all property has grown in value – some cities and towns will go up while others will go down. Even if a property has risen in value, it still doesn’t mean it has delivered an acceptable return. A market rising just a few percent each year will barely cover inflation and your costs for holding the property.
It’s quite common for investors to think that buying a centrally located property in a capital city is all that’s required to make money. As any investor in Melbourne’s inner city developments will tell you, it’s just not the case. Sure, the market will recover at some point, but it will likely be years before you have recouped your losses. You’re worse off than when you started!
Don’t ever be lazy with your market research. It is the most important step to achieving property investment success.
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