Don’t fall for the latest property fad – I’ve seen them all

Over the 40 years I have been investing in real estate I have seen many investment fads and fashions come and go.

While diligent investors adhered to tried and true fundamentals, I have seen many others diverted from their investment plans by chasing fads.

At our current more mature stage of the property cycle, as real estate prices boom and rental returns drop, I’ve noticed some investors start to look for a new investment fad as new property becomes more unaffordable.

Others feel they’ve missed out on the boom conditions of the last few years and are in a hurry to make up lost ground.

Some of these investors are enticed by promoters who come up with the latest way to “make a million in property” by bypassing the banks or finding the latest fad.

There’s nothing new about this…

In the late 70’s it was “timeshare” apartments. This sounded like a good idea at the time but was just a way for developers to get rid of stock they couldn’t sell.

In the late 80’s there was buying off the plan in the Gold Coast property boom. Many investors lost their shirts as the Gold Coast property market languished for most of the 90’s.

Then in the middle 90’s “buying off the plan” came back to a whole new unsuspecting generation. It sounded like a great idea and some investors who bought well early in that boom made profits.

But many investors ended up ruing the day they bought their off-the-plan highrise city apartments.

That’s because they never intended to settle but intended to onsell their properties to some gullible investor before completion. This created a musical chairs game of a succession of investors buying the same property off each other, but the game finished and the music stopped when the property cycle suddenly ended and the last man sitting or standing was left with an overpriced property they didn’t really want or could afford.

Then in the 2000’s came the push for buying secondary properties in depressed regional locations around Australia followed by seminars promoting New Zealand real estate.

I recently pulled out an old article I wrote around 10 years ago telling the story of a number of investors who bought in small regional Australian towns and then found that vacancy rates were extremely high and maintenance costs on old buildings were crippling. Others found that renovation costs were higher than anticipated and reliable tradesmen were very difficult to find.

Even worse some investors were tempted to sell their existing investment properties that had doubled in value, to chase higher returns elsewhere.

This is crazy as they have to pay agent’s commission and legal costs on the sale of their property as well as capital gains tax on their profit

Then buying another property market incurs another round of costs, as well as stamp duty.

So what is the alternative? It’s buying well-positioned properties that have strong appeal to owner occupiers as well as tenants.

In general these should be an established property rather than paying a premium for a new property and preferably one with a reasonable land component (as land appreciates in value while the dwelling depreciates in value over time).

It is also important to buy your properties at a good price, below fair market value. This is not difficult at present because there are many desperate vendors “giving their properties away”.

Then let your properties’ value go up with time. Good properties double in value every seven to 10 years. Rents also go up over time. The astute investor will then borrow against the increased equity in their investments and use this as their deposit for your next property.

Real estate is not a get-rich-quick-scheme. Don’t be distracted by the latest fads. Buy a good investment property in an area of strong capital growth and consider it a long-term investment.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property. Subscribe to his Property Update blog.