When we invest in real estate, we do it with the absolute expectation of making money. We often view ourselves becoming wealthy, owning several properties and having a wonderful time living off the cashflow with piles of rent coming in each month. We never conceive of losing money and we are certain that our shiny new purchase isn’t just gambling or speculation.
Yet, it is easier than you think to lose money in property.
All you need to do is break some or all the rules of real estate.
- Make sure you are buying at fair market value.
- Buy property in locations of strong demand, which are central and have a reasonable commute time to the CBD.
- Buy in smaller complexes.
- Determine if the property has the right number of features and is the right size and type of home for the suburb.
- Ensure that you do your own independent research, separate from any provided for you.
These are just a few of the basic rules, but break more than two of these and your chances of a big loss escalate dramatically.
There are so many other things you can do to minimize the chance of suffering a loss, like getting the right financing in place and having a fabulous professional property manager, be patient and unemotional with your purchase. These things will all help keep you on track for a gain.
I was reading an article the other day about an investor who bought a small (98sqm) 3 bedroom townhouse with a single garage in 2007 for $279,500. What intrigued me was that the investor just resold the property for $215,000 – a $64,500 (23%) loss. It was reported as the cheapest sale made in Queensland’s weekend auctions at the time.
I thought it an extraordinary result so I started to investigate, and even extrapolate about what had happened and maybe a few of the reasons why.
My first thought was perhaps it was a mortgagee sale, maybe the bank was just trying to get their money back? I couldn’t confirm this and it remains a possibility. Though the chance of this fades when I discovered that there were a number of other sales in the same complex that had been made for far less than the original purchase price. Another that had originally been bought for $290,000 sold for $227,000, a similar loss of $63,000. In total, there were 15 reported resales at losses from a total complex size of 100 townhouses.
These sales effectively could also value the other townhouses at similar prices and though the other investors have not physically sold, they are sitting on virtual losses.
Wow! So what happened? We have a few facts, and the rest we have to piece together and use our best guesses. But some things are very clear. Let’s measure them up against the five basic rules of real estate above.
- Pay fair value – it is incredibly obvious that too much was paid for these townhouses. There is no other explanation that the resale prices would be more than 20% less, eight years after they were first bought. Other properties around the country and in other suburbs of Queensland doubled in value over that period of time.
- Buy in a good location – these townhouses were located in Eagleby, near Beenleigh. If you Google that, you will find it’s about 35km south east of the Brisbane CBD, halfway to the Gold Coast. That location, eight years ago, would have been halfway from anywhere and in 2015, it’s still about halfway to somewhere. It’s just too far out to be investment grade. Google says a bus from Eagleby to the CBD would take 80 minutes, or if you could zoom up the Pacific Motorway, it would take about 30 minutes with no traffic.
- Buy in smaller complexes – this group was of 100 small townhouses all jammed in next to each other, in a suburb that was predominantly houses for lower to middle income families. So it was a big complex out of character with the surrounding area. The same applies to the masses of apartment towers that are being built now in the CBD’s of just about every Australian capital city. Many of these are being sold to overseas buyers and they could remain empty for years.
- Does the property have the right size & features? – It was the wrong type of property for the suburb – a family home would have been better. The three bed townhouse the subject of this discussion only had a single garage. So it wouldn’t have been much good for a family or people sharing. And at 98sqm, it wasn’t really big enough for a family.
- Ensure you do your own research – I just can’t conceive of an investor in 2007, hunting through the newspapers for an off-the-plan townhouse in a suburb like Eagleby. So here is where I extrapolate and make some educated guesses. In 2007, the markets around the country were moving – we were right ahead of the GFC, though we didn’t know it. If it was an off-the-plan purchase, the actual purchase date on the contract could have been as early as mid-2005 or 2006, as the townhouses had to be built. As far as I know there was no big price drop in Brisbane right after the GFC. So the buyer paid too much. And why? My best guess is that the investor bought this property at a seminar run by one of the buyers club’s that were so predominant at that time in Queensland – this deal is so like many I have seen that were promoted at the time. If that were true, the investor was likely presented with some impressive looking figures masquerading as independent research. The buyer’s clubs are often paid huge commissions which are invariably added to the selling price of the property. There are many genuine companies out there who do a great job on sourcing property for you to buy. Just make sure that you doing your own separate research to verify the facts around your proposed investment. Use an independent finance broker and your own valuer and solicitor to do the settlement.
If you don’t get it right, it is just as easy to lose money in property as it is to make money.
The keys are to get a good investing education, create a strong investing plan and follow the rules.