We’re usually writing articles about how you can craft successful strategies to develop an investment portfolio. How you can build wealth through property investment so you can retire comfortably and live the life you want. Yet it’s also important to look at the flip side.
Why is that so many property investors fail? We’re always told that property is the most stable and lucrative investment there is: if so, so how can anyone lose?
It’s worth combing through the reasons as these will help define the parameters of a successful strategy for property investment. Here are some key reasons why property investments fail:
Don’t Join The Lemmings
Pity the poor lemming. This small Arctic rodent has been unfairly mythologised as hurling itself off a cliff simply because all it’s fellow lemmings did. While not strictly correct, it’s become a handy metaphor for any venture where everyone goes along unquestioningly for the ride. And there’s something about property investment that can bring out the lemmings in everyone.
Whether it’s the literal gold rush that was Western Australia a few years back or the race to buy off-the-plan apartments in Melbourne, these ventures all collapsed due to oversupply and overconfidence in the market. We’ve seen how there is a long delay between demand and then construction. For instance, Western Sydney, a few years ago, was regarded as a property oasis as there was so much undeveloped land and housing prices were low. Yet, by the time DAs had gone through and large construction projects had finally gotten off the ground, the boom had passed. Instead Western Sydney was written off as being a victim of boom and bust.
Equally, there was a terrific rush to buy up inner city apartments in Melbourne. Again, this stampede led to a mammoth oversupply. Now those who bought off the plan apartments with lower pre-approvals 2 years ago are facing (tighter lending conditions and lower “on completion” valuations) possible hikes from the banks as they approach settlement. This could severely hurt investors who were counting on the lenders to pay out the remaining 90% of the loan. This in turn means the market is further weakened. The simple fact is that there is a market oversupply of apartments in Melbourne with predictions of a 20 percent drop in prices in the next three years.
The final example here is possibly the biggest: Western Australia. We all know of the property spike that was born from the formidable boom in mineral resources from the early 2000s and onwards. It’s always easy with hindsight to say that such booms are only ever fleeting: as our own Gold Rushes back in the late nineteenth century attest. Still, at the time, many thought it would last forever. The wealth seemed unstoppable. Wages were ridiculously high, and at one point, Perth was close to outstripping Sydney as the nation’s most expensive capital.
Yet all that came to a thundering crash several years ago. Now Perth housing prices are in free fall. Without a doubt Western Australia will bounce back – its far too desirable not to. However, currently, supply is outstripping demand. We’ve written in detail how West Australia is still a good long-term investment bet, depending on the area. Yet it’s one of the most classic lemming cases where every property investor in town reached for their wallets, convinced that the boom would never end. Of course the boom did end very swiftly and crushingly. The take home message out of all of this is not to follow the herd and not to jump on an overcrowded train leaving the station. The canny investor doesn’t follow current trends. This leads into the next point:
Don’t look for properties already inside the growth zone
There’s a definite creeping line in most capital cities and regional centres across Australia. It’s a border line that delineates where the red hot capital growth is taking place. For instance, ten years ago in Sydney, Marrickville was seen as a suburb being outside that zone of frantic housing price growth. It was the cheap suburb you could buy into and still be close to the inner city action. It was identified as a hot spot back in 2012. Now it’s well and truly inside the zone. It’s made significant leaps in the last few years. Now Marrickville is a hard suburb to break into with massive increases in housing prices. So, as an investor is it worth buying in Marrickville? Perhaps not. It’s already had its huge spike to lift it into the growth zone so now it will likely stabilise. An astute investor should be looking for the next Big Thing. Tempe or Earlwood may be better investments – both outside the growth zone (at the time of writing). This applies to other cities: where the growth zone is creeping in Brisbane’s outer suburbs and to Melbourne’s west. Yes, it’s wonderful to see an area’s median housing prices drastically rise by 48% in a year. However, the smart investor needs to consider if this is the biggest jump that region is likely to make. If so, then what you’re watching is either a plateau or a natural market correction. This means it’s time to look further afield to where the next growth will take place. Remember that all property has its own ceiling and drastic price rises are simply unsustainable.
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Buying out of emotion
It’s amazing how often investors are sucked into this. It’s true that you should buy property you want to live in. Aesthetically pleasing products such as DPN’s CASA attests to this. But you should also be careful not to impose your own tastes and impulses into what is a rational business decision. This can be especially if your tastes are outside the mainstream and you choose a property that will have very niche interests or something that’s boutique and won’t attract a large interest from renters. The last thing you want is a property sitting on the market untenanted as that hurts you financially. Buying out of emotion is also dangerous as you can end up overpaying for a property. Sometimes, in real estate as in life, it’s better to walk away if the price is too high. Emotional purchases should never be made as an investor.
Having too tight a margin of error
Why are investors forced to sell their properties at a reduced rate? Why do many crash and burn after beginning with a promising property that has all the right things going for it? Simply because their margins are too tight. We’ve seen this happen many times recently and it’s often been lower income investors who are spreading themselves too thin and consequently get hurt. They’re borrowing perhaps 90% of the loan and can just afford the mortgage repayments. As soon as interest rates go up they’re squeezed and can’t cope. This results in fire sales everywhere which further weakens the market. All investors should have a clear plan and financial strategy that has inbuilt protections from factors such as interest rate spikes or oversupply of property.
So while it’s always good to look at the insights and researched strategies that help you build a viable and wealth generating property portfolio, viewing the root causes behind why so many property investors are unsuccessful is an equally helpful tool.