Are you investing to show off or to make money?
An odd question? Maybe. However many investors ignore the financial side of buying a property.
To some, a property they can brag about is more important than making money. Properties that give you bragging rights are typically art deco apartments; inner city terraces; or Edwardian houses. They are beautiful properties; full of history and tradition and they are not making any more of them. If money is no object, then my advice is to buy one. Let’s call them ‘Super Properties’.
You will find a lot of financial planners and accountants recommend these properties to their clients. After all, you have to buy within 7kms of the CBD right? Well, wrong actually. This is a myth perpetuated either by people who don’t know any better or those who sell these properties.
Many investors who buy these ‘Super Properties’ think they are buying a sound investment, because it’s all about capital growth right? Wrong. Buying solely for capital growth is a basic error many investors make. Buying these ‘Super Properties’ is often an emotional decision and not a financial one.
It is okay to buy a property to brag about to your friends at a BBQ, as long as you realise that is what you are doing. If you are investing to make money then I urge you to think again. What most investors fail to take into account is the opportunity cost of investing in these highly negative cash flow properties. Typically, they can cost you $300 or more per week after-tax. For most, this is unaffordable. And for those who can afford it, it begs the question – What else could you do with this money?
I had a client come to see me recently who found a ‘Super Property’ they were ready to buy. The first issue was they had no idea what the cash flow was. I ran the figures and it was negative $300 per week. They still wanted to buy it though… because this is what their friends said makes a good investment.
This couple has a $350,000 mortgage and did not consider the benefit of putting the $300 toward their 30-year home loan. When we ran the figures, they were surprised to find that putting this money towards their loan meant they would be debt free in just 10 years; and save over $200,000 in interest. That is what I call guaranteed wealth creation!
Some of you by now are screaming, “What about the higher capital growth these ‘Super Properties’ get?” Sure you will get higher capital growth, but how many of these properties can you buy if they each cost you $15,600 per year after tax? One or two if you are wealthy; and the average investor can’t afford any! If you buy a property that takes both capital growth and cash flow into account, you can build a property portfolio that will easily outperform a ‘Super Property’.