The New Year is deemed as an opportunity to start over, and for investors, the last thing they want to happen is to lose money in the property market.
No one is exempted from making mistakes with their investments. Hence, proper guidance is essential in navigating the market. In an interview with Your Investment Property, Michael Yardney, Metropole Property Strategists CEO, lists down worst investment strategies to adopt in 2019 – and warns investors about the practices they should avoid as soon as possible.
1. Changing your property strategy to suit the current market
While the market has changed over the last few years, and prices are predicted to fall even more in many areas, this does not mean that your strategy should change. Proven strategies must be kept unless your goals have changed.
Yardney says that people who have a time-tested property investment strategy and own “investment grade” properties should not lose faith.
The decline in value of well-located capital city properties is temporary, while the overall long-term growth in value of “A-grade” properties is permanent.
“The current correction we are experiencing is a normal part of investing and it’s important to invest using a strategy that has always worked, rather than looking for a short term fix that will work now,” Yardney says.
2. Investing in off the plan properties to earn extra depreciation benefits.
This is one sure way to lose money in 2019, and Yardney provides the reasons why.
- The price of many off-the-plan purchases are inflated by high marketing costs, promoters' margins, developers' profits and the premium put on the price because this is the main type of property overseas investors (who cannot buy established properties) usually purchase.
- There is already an oversupply of this type of property in many of Australia's capital cities. This means that there will be very limited, if none, capital or rental growth.
- There is little scarcity in a block or 100 or 200 apartments, again limiting capital growth. Buying “off the plan” comes with uncertainty about completion dates, the level of finishes and the market conditions when you eventually take possession.
- Some investors who buy off the plan will have to sell because they cannot get the finance to settle in the current tight lending environment. Many of the new apartments will not be valued up to the contract price on completion and the banks will only lend you a low percentage of the new lower valuation on your property – not the contract price.
- Add to this the fact that banks often only lend on a 70% loan to value ratio in the postcodes where many of the big new developments are situated, and what looked like a good investment in the beginning, with starts to turn sour.
- Many of the large off-the-plan complexes are being built to a poor standard and are likely to be the slums of the future.
- Many of the purchasers of apartments in off-the-plan developments are overseas investors. They do not usually attend body corporate meetings or spend money on maintaining the building and they are likely to be very hard to chase up if they do not pay their body corporate levies.
“All this means is that you need to buy your off the plan property at a significant discount to make up for these unknowns, but currently, developers have to sell their products to you at a premium, not a discount, to make the projects financially feasible for them,” Yardney says.
Additionally, almost all off the plan developments are sold to investors. Yardney prefers buying properties in buildings that have a good proportion of owner-occupiers in them. He believes owner-occupiers tend to look after the buildings better and enhance their long-term capital growth.
3. Buying a new home in a new housing estate
These properties will also be profit nightmares in 2019, according to Yardney.
Some investors buy new homes in new outer suburban estates because they have heard that land appreciates in value, and they feel that they are getting a big block of land for their money.
However, when you look closer and add the value of constructing a house in these locations, usually the land accounts for less than half the selling price, giving these properties a very low land to asset ratio.
Others are considering buying in these new outer suburban estates in the mistaken belief that with properties being cheaper there, they will be more affordable to the masses as property values generally keep rising.
This is a misconception given that these are exactly the types of areas that suffer most when interest rates rise. Residents in these locations tend to have less disposable income than people who live in more affluent suburbs.
While they may be great places to live and bring up a family, in general, new or outer suburbs are not ideal places to invest. Yardney highlighted that one of the big factors that enhances capital growth is scarcity and that is something missing in these suburbs.
Yardney also revealed that he would avoid investing in these areas due to their demographics; they do not attract the same demand from a diversity of tenants that the inner and middle ring suburbs do.
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