Understand risks before jumping into property market

By Michael Mata

Many rookie property investors come into the market thinking they can make a lot of money from property investment without fully educating themselves or understanding the risks. The truth is, even in booming markets like Sydney and Melbourne, dodgy investments can end up draining investors of tens of thousands of dollars.

Just ask Denny Jones, a 31-year-old graphic designer based in Sydney. He learned the hard way about the perils of poor investment choices when he rushed into the game at the age of 21, believing that nothing could go awry.

Jones purchased a small studio apartment in the harbour-side suburb of Elizabeth Bay in 2017 for $215,000.

“I was living at home with my parents and I was noticing the average home or unit and how much prices were increasing. So I did the numbers and just thought I needed to get ahead of the market,” he told news.com.au. “Pretty much every day that I wasn’t in the market I thought [the opportunity] was going to get further and further away from me.”

As Jones had no money for the deposit, he went to a broker and asked about borrowing 100% of the loan. He ended up getting a $40,000 loan which was guaranteed by his parents and he used that money as a deposit for the studio apartment.

He began renting out the unit at $275 per week only to realise the market rent he was receiving was roughly $150 less than his mortgage repayments per week. Jones also had to settle fees with the strata every quarter and pay for the unit’s repairs when needed.

His rent shortfall of $150 per week totalled $7,800 annually. Jones held on to the property for just over five years before selling it in January 2013.

Suburbs close to capital city CBDs tend to have much lower rental yields due to increased competition in the rental market. In fact, in the two most competitive capital city markets of Sydney and Melbourne, gross rental yields on both houses and units reached record lows in January, according to CoreLogic.

Jones admitted that his biggest mistake was looking at the numbers without examining his cash flow and how he could expand his portfolio beyond his initial property investment. “There’s that ‘rule of thumb’ that says property prices double every 10 years and I figured that if I was in there for the long term I would probably ride out short-terms falls in the market ... I obviously just wasn’t educated enough,” he said.

Fortunately, the studio did go up in value and he ended up selling it for $318,000, giving him a $103,000 profit from the purchase price—but only after spending thousands of dollars covering the rent shortfall and miscellaneous expenses.

Investors need to make wise decisions

The assumption that capital growth is the most important factor when investing, and then choosing a property based on previous or projected capital growth, is one of the biggest mistakes inexperienced investors make, said Zaki Ameer, founder of Dream Design Property.   

“If you’re buying an investment property, you need to be able to sustain that property. If the property is going to cost you money — when the mortgage exceeds the rent — you need to have sufficient money to pay for that loss. If you don’t, don’t buy it, because you are just putting yourself under mortgage stress,” Ameer told news.com.au.

“You have to ask yourself, can you actually afford the investment property, rather than just buying it and relying on capital growth? If you can’t afford the loan then you should look at a property where the rent does exceed the mortgage repayments.”
 

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