• It can be argued that real estate is potentially the most lucrative investment
  • It’s common for long term investors’ properties to grow in value across 40 years
  • Real estate can be the most reliable asset if you bought the right property and get consistent returns while holding
  • We can potentially gain more returns from real estate than from a lifetime of jobs or risky share deals
  • Switched-on millennials now say they regret not entering the monopoly game sooner!

All true! However, do we really know what we are doing? Or do we just buy real estate and hope it will appreciate over the next decade?

Most of us buy with our emotions, which makes it very easy for the marketers and the media, and other sellers or buyers’ agents to influence our decisions.

Real estate is a great vehicle to grow your money, but you need to understand what and where to buy.

If you’re looking for an investment property and you carefully consider important factors such as property conditions, layout, development potential, job creation, and a fast commute to the CBD, you’re likely to do very well in the short to medium term and should be successful over the long term.

Many regions across Australia are currently depreciating, whereas others are growing, promoted by developers that scoop up all the margins. In some areas, the developers divide large areas of land into smaller pieces, and then proceed to sell the real estate dream; luxury, interiors and facades, to emotional buyers.

These new properties might sell for 20 – 40% more than some of the original houses in the same suburb. This is a short to medium equity hit for those investors, and over the long term they will gain a third of the profit. Over the next 30 – 40 years the property will look like a bargain; however, the potential to gain triple or more by purchasing a more appropriate property, has been missed.

Some people prefer to buy a property that’s cheap, and some feel confident enough about a particular area to buy without a real risk assessment. A common trend is to create separate income streams from one’s various properties. This is great while holding the property and paying a heavy mortgage, however, in most cases the rental yield will be only 4.9 – 6%. It could be said that a 5.7% yield and above is very good, but it really depends on the overall costs associated with that property. The payable rent is only the gross income, it’s not the overall profit or the net profit after mortgage payments. There are also other unexpected yearly maintenance costs and management costs. On average most of us will only gain a 3% or below net profit from the property. It’s possible to even end up being out of pocket overall.

If a property won’t have serious growth over the year or every couple of years, it means that the suburb and the asset class performance are weak. This is often reflected in high supply and poor demand for those kinds of properties. On the other hand, if we choose the right real estate with good reliable data, we can expect consistent growth. This means that the rental income will increase over time and so will the yield.

You might enjoy a relatively high income on a poor growth property, which enables you to pay your mortgage comfortably. However, when you will try to sell you will only get investor offers and not owner occupier offers. You won’t gain enough to make significant equity covering the debt of other properties that you hold.

If you buy a good-looking unit that simply doesn’t have the right fundamentals, for example, the optimal land size is not matched with the right number of bedrooms, bath or floors, the investment is doomed. Most sellers demonstrate only the leading products in the market. This is a great selling tactic to shift over-priced, small products. But if you fall into this trap, then you’re simply hoping for long term gains without informed knowledge or advice.

The long-term position is divided into many short terms. We buy a property that has the potential to do well over the short term, to make the most in the long term. Unfortunately, if in the first or second property cycle there is no substantial appreciation, it’s a loss which you can’t undo.

To conclude, real estate is a very good vehicle to make nice financial gains – if you know what you are doing. Experience of renting or even buying in your favourite location doesn’t mean you’re now an expert in the property market!

If you want to follow the advice of your friends, colleagues, parents or a seller or marketer – do it with caution. Always conduct thorough research and risk analysis. Real estate does have the potential to make money and secure your financial future, but you need to understand property ‘risk versus return’ and listen to the real experts.

We‘d love to hear what you think.

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