- “You can never go wrong with property”.
- “Property is the best investment you can make”
- “Why pay someone else’ bond if you can pay your own”
Does this sound familiar?
I bet it does because this is what you have been told all your life by the people around you and by the media.
This advice is crap!
Yes, property can be a great investment but it isn’t always one!
The biggest mistake people make when it comes to purchasing property is that they bargain on the appreciation rate of the house over the long term. But how certain are you that your house will continue to increase in value?
What if it doesn’t?
If you think that won’t happen – just look at Japan. Their property market went to an all time high, everyone bought into it and then it crashed like a sinking ship in 1992 and it has never recovered since.
So this example shows you – it’s not always the best investment.
When is it a good investment?
It’s a great investment when it’s cash flow positive. In other words, when you have a property with tenants and the rent that the tenants pay covers your bond, your levies, your rates & taxes and your estate agent commission – only then is your property a good investment.
I bet you some of you think “oh but my uncle bought a property in Sea Point 20 years ago and now it’s 5 times the value….”
Yes, you do get the few lucky ones that bought the property a few years ago in suburbs like Sea Point and saw big returns – but it’s not necessarily going to happen again. It was luck – plain and simple. If they really knew that the prices were going to shoot up like that, don’t you think they would have bought more properties there?
It’s like the people who bought Bitcoin when it was super low and then it went to an all-time high in 2017. It didn’t mean they were experts in investing – it meant that they got lucky. And btw most of them lost it again because they kept thinking it was going to increase in value but that didn’t happen. It fell again by more than 50%.
Here’s a simple formula to work out if your property is a good investment:
Rent you get in – mortgage – levies – rates – agent commission.
Here are 2 examples of a good property investment and a bad one:
The first example above is a cash flow positive property. Not only do the tenants cover all your costs, they are paying your property for you and you get in something extra every month as well. As the years pass, the mortgage that you pay will become less and your total profit will become more. If you decide to sell it after a few years and it did increase in value then it’s a bonus.
In the second example, the number clearly shows you why this is a bad investment. This property is a liability and it will require you to pay in extra every month to cover the costs. You will also have to put some money aside for the maintenance every year. And believe me – that will come and you will lose some more money. The only hope for you for this property is that the property will increase more than the inflation rate.
As you can see – a property can be a good investment and it should be seen as a long term investment to make proper sense of the numbers.