After 18 months of an incredibly strong property market, there is plenty being said about what’s going to happen in the market and the best way for people to make money in real estate this year.
While property is a great vehicle to build wealth, there are a number of myths that we see coming up a lot that I think we need to question.
Cash flow is king
In an environment where we have been able to get super-low interest rates with many mortgages on sub-2 per cent rates for a period of time, the allure of positive cash flow has continued to grow.
While receiving a good rental income is important as it does help you service your debt, putting too much focus on cash flow can really hurt your portfolio’s prospects longer term.
What I mean by this is that it is capital growth that ultimately allows your portfolio to continue to expand. If you focus too much on high yields, you might find yourself struggling to build a portfolio as you won’t have the equity to work with to buy more properties.
It’s also easy to forget that your rental income will typically increase every year. The longer you hold onto a property, the higher the likelihood that it will actually end up being neutrally or positively geared. This allows you to buy into far better locations that have a long track record of capital growth while still benefiting from a solid rental income.
There’s no doubt that over the last 18 months we’ve seen a big push towards houses. The reasons for that have been obvious in that many people have been stuck inside and really needed the extra space for work and managing a family that was cooped up inside all day.
However, you shouldn’t discount the value of a well-located property that comes with a smaller land component. What I mean by this is that you can potentially buy into a blue-chip suburb in a small apartment block and effectively get a very good land component. These are typically blocks with 3-4 apartments on them with their own parking and outdoor space.
Now that house prices have really become unaffordable for many people, the next obvious place for a homebuyer to look is something a little smaller, that still has enough size for their needs.
Everyone can get rich
When the market’s hot, everyone’s an expert at buying property and there are plenty of people out there telling you that you can get rich through property alone.
The reality is that there are some hurdles that the average person needs to overcome before they can build a significant property portfolio. The main issue most people face is serviceability and this only gets tougher as you begin to buy more properties.
Lenders will typically cap your borrowing when you start to reach a higher debt to income ratio and if you don’t have enough income to begin with, purchasing your first property can be a challenge.
I purchased my first property when I was only 18 and I was able to do that because I worked a construction job that had a decent income. I wanted a high paying job because I knew that it would help me get where I wanted to go faster.
So while it’s possible to build wealth through property, you’re going to have enough income to get you started and maintain some degree of debt. For low-income earners, there’s no magic bullet.
You can predict the property market
When we’re in a bull market it’s relatively easy to make money in property as the vast majority of the market is rising. When things start to slow down, we hear people beginning to want to time the market and wait for the right time to enter.
While everyone is different, there are always opportunities in every type of market. My job is to seek out the best opportunities for my clients irrespective of what the market is doing. When a market is slowing down, it gives you more selection and the opportunities to negotiate hard. When the market is hot you’ve got to work incredibly hard to find opportunities.
Either way, there are going to be buying opportunities if you’re prepared to look. The biggest mistake most people make is sitting back and waiting for the perfect time, only to eventually miss that moment by never pulling the trigger. While we can gauge how a market is moving, picking the top or bottom is a near-impossible task.