If you want to generate wealth, there are few avenues better than property investment. With the right purchases, you can significantly grow your initial investment, building a great deal of wealth for you and your family. However, there are many traps you could fall into along the way; some of them set by untrustworthy consultants or investment firms.
Here are some of the false promises and information that you might hear from consultants while trying to figure out where to invest your money:
1 – Wealth is Only Generated in the Long Term
I’m not suggesting that long-term planning isn’t a fundamental part of real estate and property investment. The problem is that, depending on the consultants you are talking to, ‘long term’ can mean many different things.
For example, it wasn’t that long ago when a long-term optimistic projection increased equity was 7 years. Then, over time, consultants started to stretch that time frame out to 10 years. And then when the economic downturn came, those same consultants who were previously preaching 7 to 10 years suddenly started to define the long term as 20 years or more.
Why the sudden change? It’s because they can’t take responsibility for what they sell because they can’t guarantee what the actual investment outcome will be. Therefore, they’ve started to sell any piece of real estate with the promise that the profits will be in your long term gains. Never mind that their definition of ‘long term’ is getting longer and longer as time goes on. Believe me; there are many ways to generate wealth over the short term through property investment; they just aren’t telling you about them!
2 – Misleading Capital Growth Calculations
If you carefully check, you will notice that almost every real estate and property investment consultant has a property growth calculator that shows steady capital growth. Sometimes, their rate of growth is 7%, sometimes it’s 4%, but the trajectory is always pointing upwards.
While this information promises excellent capital growth and a solid increase in rental income, you can’t trust it. It’s simply a marketing and sales tool. The reality is that while most of your results could be very good and have a positive cash flow, they can’t be guaranteed. Tax returns can often turn a negative cash flow into a positive one, but not in these real-time cases.
3 – Over-Focusing on a Single Type of Real Estate Investment
During times of rapid growth, almost any investment can seem like a good one.
Just five years ago when Sydney was still on the rise, it was incredibly easy to sell just about any product, no matter what the level of demand. Even though marketers and consultants knew there was an oversupply of a type of property in a certain area, they would still push sales due to the possibility of high commissions. For example, back in 2015, approximately 25,000 new apartment units were being built in the Brisbane inner city, flooding the market. However, due to inaccurate population growth predictions, robust suburb renewals, and infrastructure misinterpretation, there was almost no demand for these 25k apartments by the time they were finished. The consultants and marketers still walked off with their commissions, but investors were left hanging.
In June of 2019, the risk is still very high in terms of equity growth for these apartments within a reasonable time. Even a projection of seven years in most of the inner city areas is considered to be ‘ambitious’ at best, as there are still more than 15,000 units to absorb into the market over the next two years, taking us to 2021. So why do consultants still push these investments? It’s because smarter property investments, such as houses on decent-sized pieces of land, show less potential for commissions that go to the advisors or their firms. This is why even though the housing market is growing in general, less focus is put on it by those consultants.
Another example of focusing too much on a single type of real estate is townhouses or small house products per unit. On the plus side, these aren’t necessarily a bad investment as there has been an increased demand for an affordable product that’s somewhere in size between a house and an apartment unit. The problem is that sellers were putting their small townhouses that sat on a 120m2 piece of land for sale at 50% more than the cost of an established 3-bedroom house that sat on a 1200m2 piece of land. Not unlike with the apartment units, this kind of figure ratio analysis jeopardized equity on these small products.
4 – A High Perception of Rental Income
We’ve somehow gotten comfortable with the idea that, even if property values don’t skyrocket in the next few years, we will still see an exceptionally high 5% rental yield. At least, this is what most agents and consultants will tell you.
Unfortunately, this is a misconception as well. While some will see a 4.5% to 5.5% increase on rental income to make their mortgage payments bearable, most of us simply won’t enjoy that kind of rental yield, especially with the strata fee. The 5% the consultants are talking about is gross only, without taking into account the management fee, advertising fee, property costs such as council, water, body cooperate, maintenance, and land tax, high-vacancy rates, and other operating costs. Add to that the interest on the loan payment and your 5% rental income likely won’t be enough to cover all the outlays. Even your tax return probably won’t be enough when your property is losing money because of a high vacancy rate and oversupply.
Here is the silver lining: capital growth in Australia. If you buy well, the rent will follow the property price upwards. In the long term, your investment can, therefore, turn into a real cash flow asset. When property grows in value significantly, you will need to sell and close the other loans to set a net asset that will create wealth for you.
Because of this false perception of rental income, we likely won’t see a significant return on our investments in our lifetime. It’s our kids who will enjoy our wealth!
5 – Relying on Non-Independent Advice and No-Risk Analysis on the Property
Over the last few years, there were a lot of experts and marketing companies in the field who were trying to predict capital growth. Many of them tried to hide behind the analysis of reputable investments firms, statistics, and research companies that gave a general view of the market. Unfortunately, the majority of that input was based on the past and didn’t have much relevance to the future.
A lot of investors treat infrastructure as gold. I view things slightly differently. If it is directly related to your specific property location and asset class (usually in an in-demand spot), then yes, infrastructure can be super valuable. If this is not your situation, I would have to say no, as the majority of the real estate investment companies use information about infrastructure to generate false marketing to push sales of asset classes.
Not everyone actually understands the concept of property risk and return. As we’ve established, real estate is a long-term game, but it’s important to know that we can still potentially gain substantial equity year after year, not just a tiny bit over 20 years. After all, if that was the case, then what would be the point of smart investing at all?
There is a straightforward formula to investing: When you invest $1, you want to see a $2 return within a reasonable time. Sometimes, long-term investments are your only option, where you will only see that $2 return after 30 years. Many people do this to create wealth for their children.
However, if you have a choice and you’re savvy enough to understand how smart investing works, you can significantly shorten that timeframe by resisting the temptation to buy any property sold with false promises. To increase the likelihood that you can create significant wealth with your property investments, you always need to seek out independent advice. Unbiased analysis should give you the key property fundamentals with proper risk management, so you will always know the risks associated with the property.
A low-risk investment means that you have an excellent chance to do well in the long term, turning your $1 into $2 (or even $4!) over the course of 16 to 20 years. But if you’re looking for a more lucrative investment channel, even if you don’t have a strong intuition about what to buy that will appreciate in value, we highly recommend talking to us! We will give you an honest and straightforward assessment about potential investments, avoiding any of the false promises or misleading information that many consultants use to get your money. If you want to gain yearly or short-term equity, then you need people in the know; you need us at Invest in Properties.
We can’t wait to start working with you to generate your wealth!