Buying at bargain prices is a consumer spending tactic, buying acapital asset for its potential performance requires a very different mindset.
Many property investors are mesmerised by investing with ‘bargain’ entry prices and can’t wait to produce their wallets. Many are being manipulated by less scrupulous sales people into buying assets that have no foundation of performance criteria to support their capital investment.
This is a common equation in Australia and is most vividly demonstrated by the rash of US property sales to Australian investors. The US economy continues to malinger in very low Gross Domestic Product growth indicating thatthe value of the goods they produce and sell is not increasing over time. Unemployment is still over 10% in many areas decreasing any pressure for wages to risethat would traditionally lead to increased demand for new or upgraded property.
Would you invest where the Government owes roughly one year’s total income for the whole country, unemployment is high creating decreased taxation revenueand company income is close to stagnant and only maintaining taxation contributions? This Governmentis being driven to focus on increasingits taxes, decreasingits spending and investment programmes and hence decreasingits debt for a number of years. Government debt reduction programmes have historically led to an environment with decreaseddiscretionary spending for employees and stagnant or decreased demand for property.
Importantly what could your capital, which is tied up in this under performing property, have achieved if it were to be exposed to above average capital gains returns? This is called the cost of thislost opportunity and is the foundation of why you need to consider selling under performing investment properties.
Capital is the name we give to money we use in a certain way. We use it to invest in assets that have a reasonable chance to preserve our capital whilstgiving us the opportunity to wait for its value to increase as the market for that asset increases. Increasing demand in property is tied to population increases, supply of housing decreases, infrastructure investment and other factors.
Many of us consider the average capital growth of property to be seven percent over time and may mistakenly assume all property goes up this amount per annum. We may even take this further to assume that if our property doesn’t grow in one year we will have above average growth in future years as it ‘catches up’. I vividly remember a client holding a property with one percent annual capital gain over eight years costing $1300 per month to hold.
Preservation of capital relates to the risk profile of the area and the property style. This is another discussion.
What most of us are seeking in a sustainable property investment portfolio is capital growth without personal effort. If we hold property and it doubles over time we have created an increase in our capital. If we do this several times we can arrive at our desired result with a group of properties that have doubled in price, sell some to own the remainder outright and live on the income.
In comparison bargain pricing stimulates our excitement and consumer spending habits where saving money gives us more to spend on other things. For some this causes them to forget their capital investment. They end up buying property that gives them more income and may not have the understanding to preserve it.
The above information is supplied by PIAA.
Disclaimer: while due care is taken, the viewpoints expressed by sponsors do not necessarily reflect the opinions of Your Investment Property.
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