Key takeaways
While many Australians are keen to invest in property to secure their financial future, the statistics clearly show that most investors fail to achieve their goals.
More than half of those who buy an investment property sell up in the first 5 years and only around 20,000 investors have joined the 1% club who own 6 or more properties.
Maybe that’s because the market is rife with myths and misconceptions that mislead not only beginning but also many seasoned investors.
Myths and misconceptions can easily lead us astray, so keeping our eyes on empirically supported facts and holistic strategies will always serve us well.
Remember, a well-informed investor is a successful investor.
While many Australians are keen to invest in property to secure their financial future, the statistics clearly show that most investors fail to achieve their goals.
More than half of those who buy an investment property sell up in the first 5 years and only around 20,000 investors have joined the 1% club who own 6 or more properties.
Maybe that’s because the market is rife with myths and misconceptions that mislead not only beginning but also many seasoned investors.
So let’s unpack some of these myths and get a clearer picture of what property investment really entails.
Myth 1: Property investment is simple
Reality: While property investment is simple, it’s not easy and that’s not a play on words.
Many people start investing in property thinking it’s straightforward, but the high attrition rates within the first five years, and the fact that 92% of investors never get past their first or second property, reveals the true picture.
Myth 2: You make money when you buy your property
Reality: That’s partially true, but not because you buy your property cheaply which is how most investors interpret this myth.
Buying a “bargain” is a one-off bonus.
On the other hand, the key to making money in the long term is purchasing an investment-grade property in a top location that will outperform the market in the long term with robust capital growth.
Myth 3: Properties increase in value every year
Reality: While over the long term, properties have historically risen in value, in some years might certain locations see flat growth or even a decrease in property values.
And different states and even suburbs can have vastly different property cycles.
That’s why it’s essential for investors to understand how the property cycle works and have financial buffers in place to buy themselves time (to ride out the cycle), not just a property.
Myth 4: Property values double every 7-10 years
Reality: This generalization may look good on paper, but it’s far from universally true.
While some properties might double in value within this timeframe, this is an average figure based on ABS stats over the last 40 years.
However many properties, in fact over half, don’t grow in value so fast – I guess that’s how averages work.
And over the long term, regional properties have not grown as strongly as most capital city properties.
This leads to the next myth…
Myth 5: All properties make a good investment
Reality: This is a big one. Many people enter the property market with the assumption that any property can become a golden goose, churning out financial rewards.
That’s far from the truth.
There are 11 million dwellings in Australia with a total value of around $10 trillion and yes, any of these can become an investment – just kick the landlord out and put a tenant in and you’ve got an investment – but that doesn’t make it “investment grade.”
An investment-grade property is one that’s likely to outperform averages in terms of capital growth because of its location, intrinsic value, or scarcity.
These are properties that are in high demand but low supply and appeal to a wide range of affluent owner-occupiers, are in the right location and are close to lifestyle amenities such as water, cafes, shops, restaurants and parks.
This type of property also appeals to a wide range of tenants and is resilient during market downturns.
On the flip side, a non-investment-grade property – what some would call “investment stock” might have the opposite characteristics: located in an area with fewer growth drivers, less demand, or oversupply issues.
Many apartments in those Lego land high-rise towers fall into this category.
Investing in such properties can lead to stagnant capital growth and higher risks.
So, it’s not just about owning a property; it’s about owning the right property.
Don’t just grab a property because it’s within your budget; make sure it has the features and location that will make it a solid long-term investment.
Myth 6: Property investment is fun
Reality: The idea that property investment is an exciting venture can often lead to emotional decision-making.
In reality, property investment should be boring so that it can make your life exciting.
Your investment decisions should be evidence-based, numbers-driven and focused on the long-term gains.
Emotion has little place in a successful investment strategy.
Myth 7: Invest in your comfort zone
Reality: Emotional familiarity can lead to poor investment decisions.
Just because you live, holiday, or plan to retire in a particular area doesn’t mean it’s a good place to invest.
Myth 8: Property investment is a get-rich-quick scheme
Reality: Building a robust portfolio takes time and discipline.
It’s usually a journey of 25-30 years to reach financial independence through property investment. It’s a marathon, not a sprint.
Often the first 5- 10 years are when investors make mistakes and learn what not to do until they find a strategy that suits their goals, budget and risk profile.
The next stage is the asset-building phase of their investment journey, and this takes at least two full property cycles.
In this stage, you borrow and gear to build a large asset base of income-producing properties, and then eventually you slowly lower your Loan to Value Ratio so you can live off the Cash Flow from your property portfolio.
Myth 9: There’s one “Australian” property market
Reality: While the media frequently talks about “the Australian property market”, each state has its own cycle, and even within states, there are sub-markets based on property types, locations, and price points.
It’s a mosaic, not a monolith.
Myth 10: All properties increase in value over time
Reality: Unfortunately, some properties can stagnate or even depreciate.
Markets in regional Australia or mining towns can be highly volatile and risky for long-term investment.
And even some secondary capital city locations have stagnant growth for long periods of time.
Myth 11: Negative gearing is a surefire way to profit
Reality: When it comes to property investment, you’ll often hear two conflicting philosophies advocated.
Some suggest you should invest in property to achieve positive cash flow – that’s when rental returns are higher than your mortgage repayments and expenses leaving money in your pocket each month.
Others suggest you should invest for capital growth looking for an increase in the value of your property.
This second strategy usually leads to negative cash flow (negative gearing) in the early years because properties with higher capital growth usually come with lower rental returns.
But there is a third element to investment that many commentators forget to mention and that is a risk.
Considering cash flow, capital growth, and risk, when investing in residential property you can only typically have two out of the three.
If you want a property investment that is low-risk and has a high cash flow you will have to forgo high capital growth.
If you are looking for a low-risk investment that has strong capital growth (my preferred strategy), you will usually have to forgo high rental returns (cash flow).
But let’s be clear…Negative gearing is not an investment strategy.
Now I know this will confuse some people, but your cash flow position after taking into account your investment property rental income and your expenses is really a finance strategy or a statement of your finance and leverage.
As I explained… my preferred investment strategy is to buy investment-grade properties that will increase in value and properties that will bring in increasing rent over time, because both these factors (increased value and higher income) will allow me to buy more properties that will increase in value.
So while many people buy real estate for cash flow I buy my investment properties to allow me to buy more investment properties.
And I can do this because the growth of my property gives me the equity required and the increasing rent helps service my debt.
Myth 12: Cash flow is King
Reality: It is important to understand that property investment is a game of finance with some houses thrown in the middle, which means cash flow is critical to keeping the property investment game, but it’s really capital growth that will get you out of the rat race.
Residential real estate is really a high-growth, relatively low-yield investment, so your aim as an investor should be to build a substantial asset base over time and this will eventually become your cash machine.
But things must be done in the right order – capital growth first, then you can “buy” cash flow once you have a substantial asset base.
Many investors are looking for cash flow because they’re thinking about the here and now, rather than the long term.
They are buying properties that may solve a short-term problem but won’t give them the long-term financial freedom they’re hoping for.
The whole point of any investment is to see an increase in the asset value, but in order to hold your assets long-term you will obviously need to service your debt, which strong rental yields and good cash flow can help you achieve.
This pack of free suburb reports can help you target high cash flow and growth suburbs and can get your next property search off to the perfect start.
Myth 13: You should always follow the crowd
Reality: When you get caught up in the hype and follow the crowd, parking your hard-earned dollars where others are investing, you are often playing a risky game
In fact, FOMO (Fear Of Missing Out) can be a dangerous motivator in investment.
Just because another investor – or a crowd of investors – is flocking to a particular suburb, town or development, that doesn’t necessarily mean it’s safe or suitable for you to invest there, too.
You can’t assume that just because plenty of people are doing it, the research and due diligence has been done.
Due diligence and personal financial goals should dictate your property investment strategy.
Myth 14: You should invest mainly for tax deductions
Reality: Investing solely for tax benefits is a misguided strategy.
Tax deductions like depreciation or negative gearing can be attractive, but they shouldn’t be the primary reason for your investment.
In essence, they are side benefits that come along with a solid investment, not the end goal.
An investment should stand on its own merits, providing strong capital growth and rental yields over time.
Tax benefits are the icing on the cake, not the cake itself.
Investing for tax reasons could lead you to make sub-optimal choices that don’t align with your long-term financial objectives.
Sure, you might get a tax break today, but if the property doesn’t appreciate well, you could find yourself lagging behind in the long term.
The real wealth comes from long-term capital growth and not short-term tax advantages.
Don’t just grab a property because it’s within your budget; make sure it has the features and location that will make it a solid long-term investment.
Understanding the difference between investment-grade properties and the rest is a cornerstone of successful property investing.
Myth 15: Debt is bad
Reality: There has never been as much information about how to become financially fluent as there is today, however, there is just as much financial misinformation isn’t there?
Like debt is bad!
Bad debt is bad, but using productive debt that allows you to buy income-producing properties that increase in value is the strategy smart investors use.
They recognise that debt is not a problem, not being able to repay it is.
The poor are scared of debt because they’re not financially fluent and aren’t money savvy- but the rich know how to use debt wisely – it’s been that way for hundreds of years.
Myth 16: Real estate agents are on your side
Reality: Agents primarily represent the seller’s interests, not yours.
While they can provide valuable information, remember that their primary goal is to secure the highest possible price for the seller.
However, you can level the playing field and in fact, tip the scales in your favour by engaging a buyer’s agent to represent you.
Myth 17: New and off-the-plan properties make good investments
Reality: The allure of shiny new apartments or homes can be incredibly tempting. They come with the latest features, modern designs, and often, some tax depreciation benefits. However, these factors alone don’t necessarily make them good investments.
First, with new and off-the-plan properties, you’re often paying a premium for the privilege of being the first owner.
That premium doesn’t necessarily translate into immediate capital growth. In fact, these properties often depreciate in value faster than older, established properties.
Second, the risk of oversupply is a big concern, especially in high-density areas where multiple new developments might be going up simultaneously.
This can lead to rental competition, potentially pushing your yields lower.
Third, the actual value of the property once completed may not meet the sales pitch or the glossy brochures, affecting your loan-to-value ratio and thus requiring you to chip in more money than initially planned.
Finally, there’s the “what you see isn’t necessarily what you get” factor.
Until the property is built, you’re mainly investing in a concept, which might look vastly different from the final product.
Myth 18: Older properties are always a money pit
Reality: While older properties may require more maintenance, they often come with distinct advantages like larger land size, established neighbourhoods, and unique architectural features.
With the right updates and proper care, an older property can offer excellent investment potential.
Myth 19: Always go for the lowest interest rate
Reality: Property investment is a game of finance with some houses thrown in the middle.
All strategic investors protect their portfolios by having a rainy-day financial buffer in place to see them through the ups and downs of the property cycle.
Sure a lower interest rate can save you money in the short term, but it’s essential to consider other factors like loan features and flexibility.
Myth 20: I’m too old – it’s too late for me to invest
Reality: Sure it’s tougher to reap the rewards of property growth if you’re older, but it’s never too late. Even in your 60s, there’s still the opportunity to amplify your retirement funds – and don’t forget the legacy you’re building for your own children and grandchildren.
Nowadays, the option to utilise a self-managed super fund also means you’ve got extra leverage to purchase a property that can potentially generate more weekly cash flow than your superannuation fund, particularly if you don’t have the finances to carry you through all of your twilight years.
Never assume you’re out of the game because of age or finances.
Note: It’s crucial to approach property investment with a balanced perspective.
Myths and misconceptions can easily lead us astray, so keeping our eyes on empirically supported facts and holistic strategies will always serve us well.
Remember, a well-informed investor is a successful investor.
