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.
Simple!
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
