Six property investing myths
Destiny Financial Solutions founder Margaret Lomas debunks property half-truths
Listening to the property experts, you’d never guess it was the 21st Century. They all seem to be teaching the same old strategies for property investing, and it’s almost like we never had a global financial crisis at all!
With the property landscape changing all of the time, largely as a result of some of these economic influences, savvy investors have to keep up and realise that everything is changing rapidly. So here are the six things that annoy me the most and what I believe have become property investing myths.
Blue-chip properties, in city CBDs, grow best
I can’t believe people are still clinging to this! Those who insist that only Central Business District (CBD) properties qualify as blue-chip property, and only blue-chip property grows well, clearly do little real research and are overlooking the significant evidence that shows that it is not the location, per se, which affects how well a property grows. While location may play a small role in property choice (which occurs last in the purchase process), initially there are numerous factors that play a vital role in whether an area, and so an individual property, will grow well, or not.
The regions have good cash flow but lower growth
While the regions do often show a better rental yield, most probably because of the lower buy-in prices and the relatively higher rent returns, it doesn’t follow that they also perform less well in terms of their capacity to grow in value .
In his ‘2009 Iconomics Report’, Terry Ryder examined property growth over the previous 15 years. This study proved empirically that many regional areas had experienced exceptional growth for the period, and that most CBD and coastal properties showed the most lacklustre growth of all.
While it’s true that ‘location, location, location’ may be the key to good growth, it’s not true that there is any link between that premise and the location being the seaside or the city.
You have to buy median priced property, or
to do well
When an area grows well, it is usually the result of ‘intrinsic’ growth drivers. Intrinsic growth drivers are qualities that exist within an area (factors that are sustainable and ongoing) such as population growth, infrastructure planning and economic vibrancy.
When an area exhibits an abundance of such drivers, all property in that area will grow well, regardless of whether it is low-priced or median-priced. Having said that, the higher the price, the less well the property will grow. This is because, as prices increase, fewer people are able to afford to buy property with higher price tags, and more people fall into those lower price brackets. Usually, this places more pressure on lower-priced properties, and I have found that, as long as the area as a whole is growing, lower-priced properties will achieve the best growth rates of all property in that area.
You must choose between cash flow and growth
The whole point of buying property as an investment is to see an increase to the value of the asset, and the greatest possible income from that asset during the time that the investor owns it. The ‘experts’ have created this misconception that you must choose by continuing to validate the theory that a property can only have one of these characteristics, either cash flow or growth.
This is simply not true. Buying property that has both is not only highly possible, but such property always exists somewhere, regardless of the present state of the economy.
As an investor, your goal must be to ensure that each property you buy provides the best possible growth, for the best possible rental yield, during the period that you own it. You want your purchase to have its best performance - its greatest period of growth and most attractive rental yield - just after you buy it.
Market timing is the key
You’ll often hear property experts and those trying to sell investment property tell you that, “It’s not market timing, it’s time in market”.
My theory is that this is often said to help you deal with any short-term negative performance that the property they sell experiences. When someone is giving you property investment advice based about an area in which they have available stock, the likelihood that the area is the best available investment at that moment, and is the closest match to your own individual investing needs, is unlikely.
It’s true that if you keep any property long enough (with a very few exceptions), the sheer time that you remain in the market will most likely smooth out short-term negative growth and cash flow losses, and the property will ultimately be worth more than you paid for it. Whether its future value is high enough to have made the overall performance strong or not is another thing, and often once you consider the holding costs, the overall returns can be dismal indeed.
However, if you want to build the best possible property portfolio, one that outperforms the average and contains properties that consistently deliver high returns, giving the greatest possible growth during the time you hold it, market timing is the key. You want to find an area approaching its boom, and have that boom occur during your ownership – you want this to occur with every property you buy.
You must personally know the area you buy in
You should never fall into the trap of believing that you should buy only in the area where you live because it’s an area that you know well. When people insist to me that they must at least start by buying in their own area because they know it so well, I ask several questions about their area. In almost every case, I discover that the person in fact has very little knowledge about the most common growth drivers in their area, and what they actually ‘know’ relates to lifestyle features.
What you know about your area is all the information that is relevant to you as an owner occupier. While this also becomes important for a renter – your potential future income-producer – this information is by no means the catalyst by which an area will achieve that ‘better than average’ growth.
The most crucial information when you are looking to invest in an area is data that local residents are unlikely to know about their area. It’s also unlikely that you will be lucky enough to be living in the area which, at the moment you are about to invest, is among the hotspots. While I have seen it happen, more often an investor, particularly one using home equity to leverage into an investment portfolio, will live in an area that is coming out of its major boom phase. They have most probably been able to grow equity in their home because their area grew really well, but by the time they decide to use this equity, the area has settled into its stabilised growth phase and it will begin growing less well than other potential areas.
Always remember that you don’t have to live in an area to know it well. By the time I buy in any area, I can guarantee that I ‘know’ it better than the locals do. What I know about that area, though, relates to economics, and what the locals know is more likely to relate to lifestyle. Lifestyle features rarely create boom towns, whereas economic vibrancy is the cornerstone of a future hotspot.
Invest as if you live in the 21st Century and you will achieve great things. There are many areas which are presently being ignored which will lead the recovery and provide great yields and growth to those who buy there. These areas are easy to pick as long as you understand what drives growth and the relationship between a growing area and its economic vibrancy. Things are more complicated than they used to be, but the market is no harder to pick today than it’s ever been.