The real cost of buying the wrong property

Wednesday, 8th Feb 2012


It’s no secret that the Perth property market has suffered over the short-term since our 2006 boom. However, with the resources boom fuelling a two-speed economy, property in Perth has been viewed by many (and myself included) to make a “recovery” more so than its national counterparts.

With increasing rents, low interest rates and the ability to purchase property at competitive prices, there is currently an excellent window of opportunity for investors.

It’s at this time of rising confidence that investors need to be savvy, cautious and selective with their purchases. Not all properties grow at the same rate – and the cost of buying the wrong property could be higher than you think.

What’s the worst that could happen?

Property is a popular investment vehicle for many Australians because it appears safe and stable. It’s widely believed that all properties will grow in value, and that the “worst case scenario” is simply a lower rate of capital growth.

Sadly, this is not the case. Recently we have been contacted by owners of properties that have significantly dropped in value, severely undermining their owners’ investment goals. Other properties have stayed stagnant and are likely to continue in this vein for a number of years to come.

Here’s some examples:

Townhouse, QLD :        Purchased for $384,900            Re-valued at $238,000

Apartment, WA:           Purchased for $349,000            Re-valued at $310,000

Apartment, WA:           Purchased for $1.2 million        Re-valued at $850,000

Townhouse, VIC:          Purchased for $510,000            Re-valued at $380,000

Why did these investment properties fail?

Every property is different, and there’s no perfect matrix of investment factors that will always produce the same result. However, we noticed a few common factors between these examples that contributed to their poor performance:

Too much supply: Property, like the wider economy, is a game of supply and demand. Large quantities of new supply, such as new apartments and new house & land packages, hold back the capital growth of established properties in the area. While there is ample supply of brand new properties, there is no incentive for established property prices to rise. Not only this, but when developers are under pressure to sell more properties (as they have been in most cities in Australia over the last 3-5 years), they offer discounts and incentives on their brand new properties which effectively discounts your property as well!

New property supply is not evenly distributed across Australia’s capital cities; in every city, there are regions that have significant supply of new property (with more supply still to come), and suburbs which are tightly held. Investors who buy in these over-supplied locations can find themselves waiting for years for “the next boom” instead of enjoying the steady capital growth they expected.

Inflated purchase prices: Another reason that some properties have not increased in value is because of commissions loaded into the price of some of the projects by developers. Our finance division has been flooded with requests for assistance where investors have realised they have lost significant value in their properties. The problem is, many of these properties were never worth the contract purchase price. Commissions in property marketers can be significant and can add up to 10% to the property sale price – putting the investor on the back foot before they’ve even begun.

Investor-targeted marketing: All the properties listed above were marketed by “Property Investment Companies” as great investment properties. The problem is, when a development project is marketed primarily at investors, it can hide the real state of the market.

Exercise caution

We’ve said this before, but I will say it again. Be careful who you trust as your property advisor.  A few things for investors to consider are:

  • If an “advisor” is offering to help you with acquiring an investment property without it costing you a cent, that’s a serious alarm bell. You need to ask the question, how are they getting paid if you’re not paying them? More often than not, they will be paid a handsome commission from a developer for selling their property to you. In that case, are they really acting in your best interests and providing you with unbiased investment information? Stick with property firms who don’t take any commissions from developers and instead get their payment directly from you. It may appear to cost you more upfront, but it will easily pay itself off in a great investment.
  • If you are looking to buy an investment property, be wary of businesses that help you acquire the property but that also sell property. This could be directly, as in they also function as regular real estate agents, or indirectly, in that they have “relationships” with developers and the like. This presents a real conflict of interest as it is in their best interests to try and sell you the properties they promote, rather than other (perhaps better) investments on the market for which they don’t make a cut on. Only a Buyers’ Agent can truly represent the buyer in a property purchase.
  • Be cautious about businesses that will only sell you very specific projects. Typically these projects are branded developments that are heavily marketed. You can usually spot them because they are packaged and promoted under a name that sounds rather glamorous. These projects in most cases are brand new off-the-plan apartments or house and land packages in outer suburban growth corridor areas. In some cases these types of projects may be an okay investment, but more often than not you can do much better elsewhere. Generally they are fully priced, full of fat including sales commissions and GST, in areas with below-average growth prospects. Not a wise investment in my books.
  • If anyone tries to tell you investing in real estate is a guaranteed investment, they’re lying. Very few things in this world are guaranteed. Although property has generally been relatively stable and profitable for many over the last 100 years, real estate is still a risk like any other investment. If they tell you it’s easy to become a millionaire in next to no time, without of taking a reasonable level of risk, they’re also lying. You can become a millionaire through property investing but it requires time, patience and most importantly smart investing.

Too many people don’t understand enough about investing in property and rely fully on the advice provided to them, often via just one source. In these current market conditions, it remains crucial that investors choose properties selectively. The wrong property purchase could leave the purchaser waiting for another Perth “boom” – while the right purchase will benefit from the tightening market conditions to provide excellent returns to its purchaser in the next 1, 3, and 10 years.

Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all matters regarding investing, taxation and superannuation.