Getting past one investment property

Wednesday, 4th Jul 2012
Categories: Finance, Newsletter

one investment property

Many people ask us why the average investor doesn’t get past one investment property.  Research done some time ago by the Australian Bureau of Statistics shows that most investors only purchase one.

  • 93.5 % of people do not own any investment property;
  • 4.0% own one investment property;
  • 1.49% own 2-4 investment properties; and
  • Only 0.1% own 5 or more properties.

In recent years, these figures have changed, but still the vast majority of people do not own a substantial number of investment properties and very few own 5 or more investment properties.

If you understand the mindset and strategy of the average investor, then you will know why.

The average investor will usually put down 20% as a deposit on a property.  They decide to start saving for an investment property and this may take many years of saving (we will assume 5 years in this example).  In addition, they will also require funds for stamp duty, which can be as high as 5% of the purchase price, and also borrowing expenses, (fees and charges, and stamp duty on the mortgage).

That purchaser will usually pay market value for the property, then rent the property out and wait for capital growth to generate equity.  Typical investors don’t understand what drives capital growth and property profits, and they will usually select properties with average capital growth rates.

In the first year, the purchaser may only just break even, as the price of the property may rise enough to cover the stamp duty on purchase.  In many cases where capital growth is moderate, it may be 2 years before a property has increased enough in value for the purchaser to cover the costs of stamp duty and other settlement and borrowing costs.

In the third year the purchaser finally starts to make some profit.  The average investor has waited 7 years from the time of deciding to purchase an investment property to actually generating any profit!

In order to buy another property, the purchaser normally needs to generate another 20% equity.  In a moderate growth area, this may take another 5 years or more.  They will only be in a position to buy a second investment property 12 years after first making that decision to invest.

In a large percentage of cases, the average investor will get dissatisfied with the returns on the property and not even get to the stage of considering a second property investment.  Many will sell within the first 5 years and re-join the ranks of people who own no investment property.

Smart investors understand that there are ways to speed up the process. If you understand how to access your equity to purchase more property and purchase high growth properties, you can build a substantial property portfolio much more quickly than you think.