Sunday, September 25, 2011

Myths and Legends of Property Investment for New Investors to Avoid

The property investment market can be a great place to invest. The core elements of successful property investment are excellent capital risk management and a good eye for good properties. The myths and legends of the market, however, aren’t based on business principles, and that’s what makes them dangerous. If you’re a new investor, it’s a good idea to learn how to tell the truth from the hype.

A certain level of sales pitch in any property deal is understandable. Inflated statements of market potential, misleading information about local markets, and “dubious” predictions of capital and rental returns without mentioning costs are just hot air, and usually a lot of it.

These are some of the typical myths:

  • The property market always goes up: It goes up relative to economic conditions like demand and prices. If credit is tight, sales are usually slow, unless you’ve got a line of credit which can cover high prices. A 10% variation in the average house price in Australia can cost $40-50,000. That’s enough to put an investment behind the eight ball for years in a slow market. 

  • New estate properties are always good value for investors: New estates can be very good value. The issues for these new estates aren't obvious. A new estate out in the back of beyond is by definition a new home buyers’ market. Prices can be slow movers, and location issues may or may not be good selling points to commuters. Lack of infrastructure like schools and amenities may also be a negative factor for buyers. 

  • Rental properties just keep going up: Rents go up, but so do maintenance costs and upkeep. Rates also tend to go up. The rental market is also fickle. Tenants may simply look for cheaper rates, meaning a rental property can go untenanted for quite a while. If you’re relying on rent to pay a mortgage, that can be trouble. 

  • Property investment is money for jam: No, it isn't. The most successful property investors are experts. They’re also very good financial managers and know how to cope with market movements, slow sales and rental property management. To get the best out of an investment property involves good business sense and having a very good knowledge of markets and returns on investment strategies. 

  • Commercial properties always bring good returns: Don’t bet on it. The commercial property market has its share of duds. The many “retail ghost towns” around the world are a silent and expensive testimony to the realities of many commercial property investments. Commercial properties need to be proven viable to provide credibility to their potential returns. 

For new property investors, the bottom line is this: Property investment can be an extremely good method of wealth creation, particularly over time. It is not a Get Rich Quick type of investment. Investments can go sour. Intelligent, informed investment in good property markets, preferably including getting professional advice regarding purchases, is the best working method for making money.

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