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When Jen and I started talking about what topics to write about for this week’s blog, she said “you’ve got to write about investment property – everyone either wants one or has one, and there just isn’t enough information out there. Which isn’t good, because it seems to have become The New Australian Dream.”
Our generation has grown up watching our parents work towards The Great Australian Dream, aka owning your own home. It generally goes something like this: buy a house, live within your means, work hard and retire at 65. Our parents were generally fortunate with the property market in this regard (particularly if they bought their home in inner-city Brisbane, Sydney or Melbourne).
But things for Gen Y aren’t the same as they were for Gen X and Baby Boomers. Bob Dylan nailed it when he wrote, “the times they are a-changing”. What might have been good money and life advice for your parents (or their parents), doesn’t necessarily mean it’s still relevant for you. You see – saving, minimising expenses and reducing debt will only get you so far - gone are the days of high interest on cash and term deposits (the 1980’s and 1990’s). And wages aren’t exactly going up a huge amount each year either, right? Though, this behaviour of saving, minimising and reducing creates opportunity - it’s a great foundation for creating the life you want.
What I’m hearing now (and is a hot topic at BBQ’s across Australia) is that The New Australian Dream is to own your own home AND have an investment property. In a ‘keeping up with the Jones’ way, wanting to have an investment property can be driven more by doing what everyone else is, rather than knowing that this is the best financial strategy for you and your family.
And you know that it’s a strategy that your bank will support! When you mention in any way that you’re interested in property, they’re knocking your door down to let you know your maximum borrowing capacity and letting you loose on the weekend property section of your local newspaper. Certain financial planners will also back you on this strategy, although they’re possibly biased and aligned with property developers.
Did they mention that to you?
Let’s talk about your Accountant. In some situations, they may be right to steer you towards an investment property. After all, they like to discuss minimising tax. And an investment property with a big loan is one way to do that. But minimising tax is generally only one thing that our clients tell us they want to achieve. Where does the investment property fit in with the rest of your goals and life?
Do they talk to you about that?
Don’t get me wrong – we discuss with property with our clients: to build and sell duplexes, to sub-divide land, to undertake renovations on investment property to increase the rent and capital value, to purchase a commercial property via a self-managed super fund – the main over-arching theme is that these strategies are created with a client’s goals in mind and have been assessed/analysed/whiteboarded with clients against other available strategies – importantly, allowing us to compare potential net returns. Easy to do for us because we have no bias in the situation.
Just because a strategy worked for one client, doesn’t mean that we roll it out to every client. Nor does it mean that because your friend or family member had success with an investment property that it’s the right strategy for you.
We create strategies for clients to achieve a result. We go in with a specific purpose for why we do what do – otherwise it makes it very tricky to measure if the strategy is doing what we want it to. And we won’t know what needs changing to get the results.
Coming back to Jen’s comment, a discussion often isn’t being had about the strategy of an investment property. Talking about all the facts and figures, now and into the future, isn’t as sexy as shopping for townhouses and chatting about it with the Jones’. Your bank, real estate agent, accountant, even your friends and family can’t clue you in that there’s more to it than simply buying it and waiting for the cash to roll in.
There needs to be a focus on the true rate of return. We do this with interest rates on cash accounts but no-one seems to get it right when talking about investment property.
I hear people discuss numbers like a 5% rental return or that the value goes up 10% per year or even that it doubles every 7-10 years, but I can tell you that’s not the TRUE rate of return.
(Which could be any property in Noosa or the Sunshine Coast, or around Australia.)
Here’s some of the things we analyse with clients when discussing investment property as a strategy:
- the amount of cash or equity they’re willing to put towards the property upfront and ongoing
- their investment timeframe
- their aggressiveness vs cautiousness
- the location or where they want to have their wealth invested
- how involved they want to be with the ongoing side of the investment
- if they already have a property or land, where it is and it’s unique features
- the responsibility the husband or wife wants to have
- the exit strategy
- how it fits in with the rest of the family’s goals (like educating the kids, taking a big holiday, working part-time, studying, the new car, starting a business, moving into a bigger family home).
- where this strategy fits in with their other strategies.
- and regarding an existing investment property, whether they should keep it or consider getting rid of it.
What I want you to take away from reading this, is that an investment property may be the best strategy for your goals BUT it also might not be.
Take time to consider all the opportunities available to you and understand the true rate of return and risk associated with each. You need to be able to discuss these types of conversations with someone who can give you unbiased information and work in collaboration with your accountant, bank and family.
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