Myths About Investing In Property

Myths About Investing In Property

YOU HAVE TO BE ROLLING IN MONEY TO INVEST IN PROPERTY
Wrong, while you have to have the capacity to make loan repayments and the savings for the deposit, investing in property is not as far out of reach as you may think. There are options that can make your first purchase easier, like:

  • Leveraging the equity in your existing home,
  • Off-the-plan properties (which have significantly lower stamp duty),
  • The First Home Owner Grant of $10,000 (Victoria) for new apartments and houses under $750,000
  • 50% stamp duty reduction savings for new or established properties under $600,000
  • Getting your parents or other family members to provide a limited security guarantee. This means they use the equity in their home as an additional security for an elected portion of your loan amount. This makes it easier for you to maximise the amount that you can borrow and/or avoid lender's mortgage insurance. (Subject to your ability to service the full loan)
  • From time to time, lenders will offer special promotions for first home buyers - your mortgage broker should know about these

NEGATIVE GEARING IS YOUR ONLY OPTION AND IT'S A BAD OPTION. 

  • “Gearing” refers to the borrowing of money to buy an asset. In this case, you take out a loan from the bank to purchase a property.
  • Negative gearing occurs when the interest you pay on the loan exceeds the (rental) income you received from the property, i.e. you are making a loss.
  • Neutral gearing occurs when the interest you pay on the loan is equal to the income you receive.
  • Positive gearing means that the interest you is less than the income you received.
  • While it would be awesome to always be neutrally or positively geared, such properties are hard to come by.
  • Negative gearing isn’t necessarily a bad thing - the benefit comes from your property’s capital growth. That is, at the end of one year, you will be at what seems to be a gross loss (after paying more interest than your rental income), but your property will generally have increased in value by a substantially greater amount than the loss you make in rental shortfall.

DEBT IS BAD

  • It used to be thought that debt was so awful that it should be avoided at all costs. People spent their lives paying off the one property they lived in so that they wouldn’t have to be in debt.
  • Not all debt is bad. Learn how to manage your debt and you can use it to leverage your current assets to buy appreciating assets.
  • Investing in the CBD is the best location
  • Not necessarily. Many properties within the CBD see little capital growth and a saturation of apartments.
  • Suburbs surrounding the CBD or close to the CBD are usually more attractive than the CBD itself and their properties will have more room for capital growth.
  • In any case, it’s best to do plenty of research on the areas that you are interested in. Look at the demographic who live there - are they young individuals, young professionals, young families, established families or empty nesters? The majority demographic of the area is generally a good indication of the kind of neighbourhood the suburb is, as well as the kinds of tenants you can expect.
  • Areas that are being gentrified are great for investing if you can get in early while property prices are still growing. This means areas that are attracting greater traffic because of cafes, restaurants, or retailers.
  • Research supply and demand of each suburb. How many properties are up for sale/lease and how many people are actually looking to buy/lease in that area?
  • Generally speaking, it’s always better to buy within the inner-suburbian areas than outer suburbs because of capital growth related to demographic, amenities (shops, cafes, CBD) and transport accessibility.

THERE'S NO CAPITAL GROWTH IN APARTMENTS - YOU SHOULD ONLY BUY HOUSES. 

  • Wrong. Capital growth isn’t exclusive to houses. While in most cases capital growth is higher in houses than in apartments, you have to remember that buying a house is way more expensive than buying an apartment. You can take several years saving up for a deposit for your house, and while you're saving the price of property goes up and suddenly your deposit isn’t enough so you need to save more money before you can even get your foot in the door! In some areas, however, unit prices have increased at a more rapid rate than houses, either because units tend to be better located than houses.
  • Investing in an apartment, while it may experience less capital growth in some circumstances than a house, allows you to get into the property market sooner rather than later and gives your apartment the chance to increase in value so that you can use the equity in that to buy another property.

PROPERTY CAN WAIT UNTIL I'M OLDER. WHAT'S THE HURRY?

  • While the property market can fluctuate year to year, looking at property prices in the long term you’ll see that property prices have increased substantially in most suburbs. The property market therefore, can often be seen as a slow investment because you generally have to wait years before you can see a big return on your investment, meaning time is a crucial aspect of investing in property.
  • Investing in property at a younger stage and age in your life means that you are giving your property more time to appreciate in value, the more time you have, the more value you can have. Yes, capital growth may be stagnant or maybe a little negative some years, but the growth you can achieve over 10+ years will be greater.
  • Starting at a younger age also gives you the opportunity to learn about building wealth through property and how to manage your finances - a bonus in anyone’s books.

THIS ISN'T MY DREAM HOME, SO I SHOULDN'T BUY IT.
That’s okay, not many people can afford to buy their dream home as their first property. Think of investing in property as a series of stepping stones towards your dream home. With each step you take, you can move closer to your dream home all while establishing a diversified portfolio of properties. While you may not love absolutely everything about the property, so long as it's financially viable, you have the capacity to maintain payments and you’ve invested in a good area, it’s not the be all and end all. Remember that you are buying property to invest in it - especially if you’re a first home buyer, you’re unlikely going to be living in the property for the rest of your life.

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