Most people buy investment properties to make a lot of money. The general idea is to build up a portfolio of properties, which are increasing in value and providing a growing income. After a while, the wealth accumulating from the investments is enough to live off on its own, providing financial independence or a very comfortable retirement.
Certainly, successful investors don't stop at one. But the reality is most property investors do. According to the ATO, 72% of property investors own only the one property. And only 10% own more than two. You don't create the kind of wealth most investors are aiming for from the one property.
Why most property investors fail
So why do most property investors stop at one? For all the focus in the investment world on strategies, most people simply buy a bad property. After years of disappointment with a poorly performing property, with little profit to show from it, or even facing a loss, they sell up, and the property investment dream is over.
The problem is generally the property. And unfortunately, so many investors buy the wrong property because the property investment industry is selling them the wrong property. The reality is, the properties being sold by property investment companies are often the riskiest.
Property investment companies specialise in new properties, primarily house and land packages and off the plan apartments. Why? Because it's the easiest way for them to get paid. Developers will pay commissions of 3%-5% of the value of a new property to the agent/company who sells it for them. So property investment companies can offer a free service to investors, while getting paid handsomely by the developer to provide that service.
why are properties sold by investment companies the riskiest?
It's a great system, right? Well it would be, if the properties being sold were also the best investments for the people buying them. Unfortunately, for a range of reasons, they're not. Here's why:
- Most new houses are in poor locations. House and land packages are invariably being sold in the outer suburbs. Why? Because that's where the available land is. Contrary to the spruik from investment companies, these are not the places most people want to live - they'll generally only live there because of affordability, or because they want to live in a new property. Most people would prefer to live in properties closer to jobs, better schools and better lifestyle options. For investors, the brutal arithmetic is this: new properties become old, but outer suburbs remain outer suburbs. Outer suburbs under-perform inner suburbs - that's a fact.
- Buying in new estates or off-the-plan apartments guarantees plenty of competition to your investment. If you were investing in a business, would you invest in one that had lots of competitors, or few competitors? The less competition the better, right? Yet investors who buy in housing estates or off the plan are guaranteeing themselves lots of competition. If you're buying in a new housing estate, not only are you competing with other houses in that estate, but also with all the future houses to be built in the surrounding area. It's much the same story for off-the-plan apartments; you're competing against many similar apartments in your complex, and its highly likely the area you bought in has lots of other complexes being developed as well. Competition drives prices down, not up, and it's no different with property.
- You're probably paying too much for the property. New properties sell for a premium, because they're shiny and new. But they don't retain that premium. We consistently see properties that have fallen in value over the first few years, because they were bought at above the suburb's median price, or because they were more expensive than an established property in a better area. If you overpay at the start, you'll make a lot less return on your investment.
The combination of inferior locations, plenty of competition and an unwarranted price premium makes a pretty poor recipe for successful property investment. Yet these are the types of properties investors are dished up when they speak to a property investment company - the very people who should be helping them make a good decision. At Aquila Property Investment, we could choose to sell new property, and if it were a great option for our clients, believe us, we would! It's much easier to offer a free service to clients than expect them to pay us. But the investment maths just don't add up.