Choosing the right investment property comes down to knowing what you need, knowing what you can afford and knowing exactly what’s available at the time you are ready to buy.
While property investing may be simple, it’s not easy and that’s not a play on words, because many investors end up paying a huge a ‘learning fee’ that they didn’t expect.
You see, many novice investors think, or are often led to believe, that bricks and mortar is a safe and easy investment and they find out the hard and often expensive way that property investment success is not so easy.
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Here are six ‘learning fees’ I’ve seen investors pay:
1. The ‘oops, I bought the wrong property’ learning fee
You buy home to in live but within a short time it just doesn’t ‘feel right’.
Or you buy an investment property and realise it’s a dud.
Did you know that statistics show 20% of investors sell up their property in the first year and 50% in the first 5 years?
So, you decide to sell within the first year or two and regardless of what price you sell the property for, you need to remember the huge costs associated with buying and selling real estate.
There’s the stamp duty when you bought it (plus the stamp duty for the new place), legal fees when buying and selling, selling agent commissions and marketing costs and, of course, the cost of moving twice in quick succession.
This means your learning fee is likely to be tens of thousands of dollars and potentially into six figures when you take into account lost opportunity costs.
2. The ‘capital non-growth’ learning fee
This is the fee that you pay when you buy an investment with poor capital growth because it’s in the wrong city, suburb or street.
Perhaps it grows at 2 or 3 per cent per annum when buying the right property may have achieved 6 or 7 percent capital growth.
A three percentage point difference might not seem like a lot but over the years this could add up to a learning fee easily in the hundreds of thousands of dollars.
3. The ‘renovation reality’ learning fee
This is the learning fee that you must pay when you realise that renovations are hard work and not as easy as the reality TV shows or the property blogs would suggest.
Perhaps you bought a property that needs a significant renovation in the order of 10 per cent of its purchase price.
But then everything ended up costing more than you expected and the project ran over time, which increased your holding costs substantially.
So you ended up sinking about 20 per cent of the purchase price into the renovation and landed in over-capitalisation territory.
This learning fee could easily cost you tens and tens of thousands of dollars as well as a waiting period of many years as you wait for the market to improve enough to get your money back.
4. The ‘I got eaten by a shark’ learning fee
Here we have Sam and Susan, a couple of 25 year olds who charge off to one of those investment property seminars that promise you’ll make a million dollars in six months.
Instead our bright young things end up knee-deep in cash flow tables, bank documents and (oh dear) a signed investment home contract that results in their off-the-plan, out of town, so-called whiz-bang investment property growing at a miserable 1.3 per cent per annum over the next 10 years.
The learning fee in this scenario is especially scary as that ‘shark advice’ could end up being a millstone around their necks for many years.
They may not be able to offload that property without making a significant loss and therefore their future lending capability may be severely compromised.
5. The ‘buying with emotion’ learning fee
You can end up paying this fee in two ways.
Firstly, when you fall in love with a property and overpay. Now while this may be allowed when you buy your home, it’s a big mistake for property investors.
The second way you pay this fee is when you miss out on an opportunity because you have an unrealistic expectation of what the property’s price actually is and offer well below an acceptable price.
You then get angry that the vendors are being ‘greedy’ and storm off, not prepared to negotiate at all.
This learning fee here is about your own ignorance and not remaining objective and basing your negotiations on cold hard facts such as recent comparable sales.
Either way the learning fee you could end up paying is considerable.
6. The ‘negotiation’ learning fee
This is the extra cost to you when you are too afraid or too inexperienced to negotiate on price.
Many property purchasers are ‘shark bait’ to real estate agents who are highly trained negotiators who are taught how to get the top dollar for their clients – the seller.
So what should a property investor or home buyer do?
Many of us have been taught to ‘learn from our mistakes’ – but in my opinion this is too expensive and too demoralising.
Rather than pay a learning fee to the market, why not pay a to a buyers’ agent to act on your behalf during your property investment journey.
It’s likely to be a cheaper as it could significantly reduce the overall learning fee you’d pay to make a mistake.
A buyers’ agent’s fee can be regarded as an insurance against paying the kind of hefty learning fees I’ve outlined in the scenarios above.
In life we all pay – the question is how much.
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 and writes the Property Update blog and hosts the popular Michael Yardney Podcast.
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