Investing in Property
What is the best way to buy rental property?
The question you need to ask yourself is – Am I buying this property as an investment?
Now this sounds like a pretty stupid question, right? But in reality, many people (myself included) have made a purchase decision on the basis that they love the “property” not the “investment.”
What do I mean? Well you have to stop and ask yourself do I really love investing in property or do I just love to own property. Many have purchased an “investment property” on the basis that they “liked” it, rather than because they had calculated it would provide a great return.
When investing in property you should always run your numbers through a property investment calculator before deciding whether to even look at a property, let alone buy it!
My first CBD apartment – aka “Investing in Property for Fools!”
I’d always wanted to own a piece of the CBD. Growing up as a kid I loved visiting the “city” to look at the skyscrapers and imagined coming here for work like my Dad did each morning. Sure, I was investing in property. I was investing my emotional security in a property location! So you can see quite clearly that it was an emotional, rather than a hard headed decision to buy a newly complete one bedroom unit back in the early 2000s. It was just something I’d always wanted to “have.”
I remember driving around the inner city with a well known property spruiker looking at projects he was involved with. Of course his level of involvement was as a master salesman. A unit became available for approximately $230k. As a young couple my wife and I discussed the pros and cons and I decided against the advice of my wife that this might not be such a great idea.
At the same time another unit had become available in the inner city block of apartments that I was currently living in. It was available at a similar price. My wife counselled me to consider this as an option. My “adviser” had discouraged me on the basis that I would be putting all me eggs in one basket. There was some truth to this advice so I followed my “dream” of an apartment in the “city”.
When I went to the office to sign the papers I remember being advised that the original unit was no longer available, but a different one on a higher floor was, at a higher price! I said OK, No problem, like we Aussies tend to do. Then I was presented with the option to purchase a “furniture package” for an extra $20k. This would “guarantee” a rental return of 8% to me for the first 2 years of my investment. I hadn’t previously considered this, but of course I said “Yes”and was told what a wise choice I had made. (Of course this made me feel good about myself!)
The truth was I bought the unit not on the basis of its potential financial return but its immediate emotional return. I never did end up living in it or even spending a single night there, although I’d often wander past and gaze up at my balcony and wonder how “cool” it would be to live here.
In fact the property was a complete drain on my bank balance due to the high costs associated with the common areas including pool and gym equipment. The rent never paid for the outgoings and I lived in hope that the price would go up so I could make a “paper” profit at least!
Now some time later I did end up selling the unit for around $300k, so it was far from a complete disaster. In the end I was very glad to sell and call it even. In reality the cost to me was an opportunity cost. What else could I have been doing with my money?
I looked recently for sales data on the city block in question and found a similar unit sold for $355k, approx. 10 years after my initial purchase. Currently in the inner city block I was living at, prices are over $650k. Remember that 10 years ago these properties were selling for approximately the same price. If I had listened more to my wife and less to my own emotion I might have ended up $300k better off!
What did I learn? I learned that whilst it’s great to listen to “advice”, be aware that sometimes advice might be just a little biased! I’ve learned to trust my own instincts more and weigh advice against what I already know to be true and reasonable. The reason I liked the apartment in my own block was that it was located well. It was quiet, had views, was close to city, walk to tram, bus and train and there was no high-rise in the vicinity. The area couldn’t be quickly re-developed and units added. In short, the amenity was desirable and there was not going to be any new properties added in the foreseeable future. This meant there was a cap on supply. Best CBD for Sleep UK