Tuesday, 8 July 2014

Is Property Investment like Monopoly or Snakes and Ladders nowadays?

I remember when property investment was easy…

Buy a house in the street you live in and put a tenant in to help pay the mortgage.

Then sometime in the next few years the rent would have increased to the point where it was paying the mortgage so the property was paying for itself.

Over time the property increased in value so you were creating wealth without it costing you any money.

That was called negative gearing and it worked.

But now we have Property Marketers and it seems that they are all Australia’s #1 property educator, and it has all got a little bit more complicated.

The big thing nowadays is Positive Cash-flow, whether that be through NRAS or buying “Smart” or buying in an area where rents have gone through the roof due to lack of supply eg. mining areas.

So does all this new complication actually work? Do we have better investment opportunities today?

The truth is, with interest rate where they are at present it is not too hard for a property to be positive cash-flow but where will that property be in 10 years in value and what will be the current interest rates then?

Well, I was having lunch the other day with a couple of clients that have each bought a number of properties with my help over the last 10 years.

One of them said that he had met a person that was a Property Manager for NRAS properties. She manages about 200 properties for her employer.

For those that don’t know NRAS stands for National Rental Affordability Scheme so it stands to reason that the tenants are getting lower (more affordable) rent. Well that is the intention of NRAS.

You would think that those tenants would appreciate the benefit they are getting but according to this Property Manager the tenants don’t appreciate it at all and many are significantly in arrears with their rent and many of the properties have been substantially damaged… some have been trashed. These were brand new properties in the last few years.

About 3 or 4 years ago I had told both of these clients that I didn’t think NRAS properties would turn out to be good investments, so you can imagine how my credibility rose after those comments from the Property Manager.
But it goes further than that…
A couple of years ago an Accountant that I was working with at the time had suggested to me that according to his research, mining towns were a great investment with house prices rising quickly and rent going through the roof. These were properties that were substantially Positively Geared. Rents for example in Moranbah Qld had recently risen to $2000 per week.

My advice to him and to our mutual clients was that the situation was both unsustainable and likely to attract too much attention from Builders wanting to cash in.  That attention would create an over-supply of properties and hence cause a catastrophe of price collapse.

Well I saw the other day that rents in Moranbah were down to about $300 per week for a house that depending when in the boom you bought it, you might have paid between $500,000 and $1m to buy.

The going price for such a house today is under $400,000 if you can find a buyer.

So what does all this tell us?

And more importantly what lessons can we learn from this experience?

Property investment can be easy but just as easily it can be quite complicated. We all feel we know property because we have all grown up with it. We have all played Monopoly and we think it is that simple. Throw the dice, land on a property, buy it and collect the rent.

I would say that from my experience property investment today is more like Snakes and Ladders.
Property is a great investment vehicle with many advantages over other investments but wherever there is a great opportunity there are even greater opportunists.
There are some good property investments out there that will help you grow your wealth but there are also some Snakes that if you land on one will take you back to start all over again.
My final word on this subject is "Be careful what you buy and who you get advice from..."
Graeme Clark
1300 131099