Property Investment over the past ten years can best be compared with white water rafting. First the safe exhilarating ride, property prices increasing, and increasing, and increasing, then look out, hold on, turbulent waters, the torrent sending many plunging over the waterfall to be left will little but the clothes on their backs.
This may sound like a horror movie and for many it was.
Then why am I not saying keep away from the river and erecting danger signs on the banks rather than encouraging people to take up white water rafting (property investing)?No matter how prepared you are there’s one thing that I can absolutely guarantee: if you’re on the river of life, it’s likely you’re going to hit a few rocks but it is how we plan for that inevitability that will lessen the impact and make for an exhilarating ride.
Rather than making better decisions before going to the banks, many after a short briefing, (a property investment seminar) leaped into the rafts and started paddling like there was no tomorrow, and as we all hope there will be a tomorrow, there should be contingences in place before leaving the river banks.
Companies running property investment seminars generally promote negative gearing (interest only loans) which is fine if you intend to paddle around a lake but that isn’t going to get you very far is it, much like a rocking chair, that is why they promote negative gearing, it creates cash flow which in turn allows you to invest in more property in the “hope” that there is capital gain over a period of time.
Little wonder we are in a recession. The water fall was always there, but as the ride was so exhilarating (property values increasing) many lost site of it and instead kept paddling (investing in more property) and in doing so the rafts they were padding quickly started to take on water when the currents changed (property values and interest rates).
As there were only one set of oars in the water a decision had to be made, should they paddle faster or bail, having only one set of hands they could only try and bail, then came the rocks, the waterfall and the rest is history, much like the companies that gave the short briefings (property investment seminars) they too are no longer afloat.
The waters are clam, the tide again is at its lowest (property prices). Many have invested in bigger rafts (bigger deposits), and are now converging on the banks, will their journey be any different?
Property Prices are only going to increase if incomes increase. Tell me, when do you think that is going to happen?
A relatively safe way to avoid the water fall is to invite someone to come along with you, another set of oars, which would make it more affordable and allow you to make principal and interest payments thus paying the property off in ten years, apposed to relying on capital gain through market influences.
The basic fundamental for successful investing is to have an exit strategy.
Say for example, you invested in a property worth $465,000 and borrowed $372,000.
Two paddling
$372,000 over 10 years (P&I) @ 6.5% = $975 weekly -$500 rent = $475 x 520 weeks = $247,000
After ten years you sell “your freehold” property for the same amount you paid for it.
$465,000 - $247,000 (what it cost you) = $218,000 profit = $109,000 each.
The two happy paddlers could decide to keep “their freehold asset” generating them a cash flow of $500 a week.
The solo paddler;
$372,000 over 10 years (interest only) @ 6.5% = $465 weekly - $500 = + $35 weekly x 520 weeks = $18,200 which is the profit if the house sold privately.
This solo paddler could also decide to keep “the banks asset” generating $35 a week.
Don a lifejacket and enjoy what can be very a very profitable ride...
Brian Dalley is a qualified NZMBA Mortgage Broker, Property Investor and former Real Estate Agent.
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I love the way how you compared property investment to white water rafting. It's true, there are many dangers in property investing, there's always a risk.
-James
Posted by: getting started in rental property investment | Monday, 12 October 2009 at 03:07 AM