New figures shine a light on the missed opportunities and failed strategies employed by investors, with many falling into the trap of buying the wrong property or doing the heavy lifting for others.
The Australian Taxation Office (ATO) reports that there were 1,895,775 property investors in Australia in 2011-12, up from 1,811,175 in 2010-11.
That’s an extra 84,601 investors attracted to the market in one year and this growth rate will only increase in the years yet to be reported. We forecast the number of investors in 2012-13 will break the 2 million mark.
Of the total number in 2011-12, 73% of investors have just one investment property while 18% have two, 5% have three, 2% have four, 1% have five and 1% have six properties or more.
This breakdown is especially significant when you consider that just 1% of the population retires financially free, meaning their investments are sufficient to provide the income they require for their retirement without the need to sell assets or rely on family or Government assistance.
The correlation between the number of Australians who retire financially free and those with a portfolio of five or more properties is more than coincidence. The lesson from these statistics is clear: those in a position to do so should not postpone a decision to invest in their own future.
It’s not surprising to see the number of property investors rise, as property continues to be viewed as a stable investment. However it’s also an investment ideally made for the long term, which is at odds with the fact most investors hold an investment property for a term of five years or less.
The reality is that a host of investors who purchased an investment property around 2010 are now preparing to sell it. They are letting themselves down. While most would have purchased their investment property with an eye on the long term future, the fact so many are preparing to sell indicates that the proper due diligence was not taken into account at the time of purchase, relative to the investor’s individual circumstances.
Instead of selling after a short period in an attempt to realise a capital gain, investors should be looking to refinance and use the equity they have in the investment property to secure an additional purchase.
The costs associated with selling are substantial and can jeopardise any investment upside the investor has worked towards. These include real estate agent commissions, marketing costs, capital gains tax, as well as the often not considered opportunity cost associated with missing out on future capital growth.
Many investors rue a decision to sell an investment property in hindsight as the opportunity to access capital growth is effectively passed up.
Investors who choose to sell after a short period of time often do so because the property becomes too arduous to hold. This is symptomatic of the wrong criteria being applied to its acquisition.
Some investors in choosing certain properties actually do the hard work – the heavy lifting so to speak – only for subsequent investors to swoop along and reap the benefits. It’s a scenario that’s very common and it occurs when investors purchase a property that causes them a financial struggle.
Scenario 1: size matters, but not in the way most investors might think
Investment properties become arduous to hold when the rent achievable does not yield an adequate return when calculated against the price paid.
Take the example of two one-bedroom units in the same market, where one is considerably larger than the other. Both apartments would likely sell for the same price per square metre, meaning the larger apartment would be more expensive.
However, the rentals achieved by both properties would more often than not be the same. The purchaser of the larger apartment, while they may have considered the extra space an advantage, has actually jeopardised their yield.
Investors that sell because the yield is inadequate find it’s often another, more experienced investor who will come along to pick up the property and implement strategies to unlock its investment potential.
This could involve converting the larger apartment into a one-bedroom plus study, or even a two-bedroom property, and adjusting the rent accordingly. The extra space in the larger apartment might be appreciated by an owner-occupier but investors should take a non-emotional view.
Scenario 2: the hidden cost of high density
This second scenario of how an investment property might become too difficult for an investor to hold is also extremely common.
Consider two one-bedroom apartments located in the same suburb but in different developments, each purchased for $420,000. One is located in a boutique apartment block, in close proximity to a range of amenities but near, not on, a main road. The second is part of a higher density development on a bigger footprint site on a main road.
The first apartment has immediate and significant advantages. Firstly, body corporate fees for apartments in boutique developments, without common grounds like gyms and pools, will be considerably less than the fees associated with the higher density apartments. In our example, the fees for the boutique apartment would realistically be about half of the high density property.
Secondly, while rentals achieved by both apartments could be expected to be similar, the internal competition for tenants from other apartments in the high density development will increase vacancy risk. This competition between apartments in the same complex extends to the eventual sale of the apartment too.
As more and more people prioritise security in the current economic climate, while seeking to prepare for their financial future against the backdrop of a more difficult budget, it seems obvious that the number of property investors will continue to rise.
However it’s imperative those investors apply the correct investment criteria to their purchase. Otherwise they risk becoming one of the all too common statistics.
Investors should adopt a mindset that focuses on acquiring a property they are able to hold for the long term and one which they will be able to use as a platform for building a portfolio. Ideally they should look to purchase an additional property or properties when their individual circumstances allow, seeking the advice of professionals, not selling the one investment property they incorrectly evaluated at the outset.