This week I was approached by a rather inspiring new business that has got me thinking about property investing in a whole new light. As you can tell I am a pro-property financial planner and while I am agnostic to it over shares, together they actually work very well together.
I will put it out there but generally financial advisers in the past have been against property and have not helped their clients make better decisions in this area. While how they got paid had a lot to do with it, I also believe they have not taken the time to truly understand the fundamentals behind what drives the property market. Propaganda built from an unregulated industry does not help and together with the nonsense that is distributed through property investment media, clients are making poor decisions based on inaccurate information.
Property decisions are undoubtedly up there with the biggest financial decisions people will make over their lifetime. Purchasing a property is a HUGE decision. The decision to buy “house A” over “house B” or to buy a property at all is a very costly and sometimes a catastrophically good or bad decision.
The biggest problems with investing in property are the following
- Cost to buy in and out – The state governments love people trading property and also love the price rises we have seen. 7 billion dollars the NSW State Government received last year. The buy costs are around 5% and the sell costs are around 2.5% usually. So if you are buying a $800,000, you would not make a dollar till the property is worth around $860,000 if not more. Hardly a good start, being $60k down from day 1.
- Time, expertise and stress - Like all things, few people put a value on their time, stress and expert knowledge in helping them in make a property purchase. This could take many weeks or months of their time and at the end of it investors have no guarantee in making a good decision. It’s a classic case of “you don’t know what you don’t know” but most investors usually make the decision themselves after spending many Saturdays going to open homes and talking with friends, family and colleagues. Bit by bit they build up the confidence to make sure they are making the right decision in their mind. Unfortunately, the time they spend, the research they do and the people they speak to are probably not the best way to go about property investing.
- Diversification – Unfortunately, unlike investing in the share market as a whole via something called an ETF, investing in the property market is usually through buying one property. Out of the 10 million properties in Australia, you are picking one. Hopefully it is an established one and not a funky new apartment, but really it’s a big call putting all your eggs in one property. You do not get a second chance with property and if you make a bad decision it’s hard to turn around and say, lets try that again.
- Holding on to bad assets - Unfortunately, property investors do the right thing and buy with a long time mindset. A must for every investor but what it means is that they hold on to bad assets far too long. I have had clients purchase the wrong property and 10 years later the asset has lost 20%. If they purchased a different property at the same time it would be at least double by now. The market is unforgiving and you do not realise it was a bad decision usually until many years down the line. Behavioural finance has taught us that we do not like to lose money or we like to hold on to things because they will come good we ignorantly believe. Unfortunately, the property market doesn’t work like that. Bad assets will always usually be bad assets.
- Long term returns & taking risk off the table– Unfortunately the property market is a sit and hold investment. While you can liquidate your shares in rising markets to take risk off the table, it’s hard to sell a portion of your property. You can’t just say, I’d like to sell the third bedroom or maybe I should sell the garage because the market is hot. With property investing, you just have to go on the ride and let the market do what it is going to do.
- Huge outlay – Unfortunately one of the ways to lower your risk and in turn get a better return over the longer term I believe is to buy a better quality asset. In property however good assets cost a lot of money. It might be $1,000,000 in Sydney now or $800,000 in Melbourne. You can’t just say I’ll buy $50,000 now as I have a little bit of spare cash I want to invest.
- Servicing capacity – When investing in property, the bank will lend you up to a certain limit and that is based on all the income you are likely to earn including any rental income. This may mean you can only borrow a few $100,000 and restrict what you can buy. Secondly, if you can borrow a larger sum, you can only buy one investment. Therefore, the servicing capacity determines what markets you can and cannot buy in. If you wanted to invest in two markets, you can’t because you can only buy one place. You can’t invest in Brisbane and Melbourne for example, you have to pick one market.
- Market Risk - While there are many ways to reduce your risk in the share market sometimes you can just get downright unlucky in property. Perhaps the council changes the rules, your neighbours build some eyesore or the local neighbourhood changes in someway. You can also experience one off events like flooding or employment to collapse like the mining boom or big business closing. Sure you can try to mitigate a lot of these but there are always risks you don’t know exist till they come knocking on your door.
So as you can see there are many other negatives to investing in property beyond the shares vs property debate. One that usually centres around which will make you more money. People usually sit in one camp and that itself is a poor mindset.
So without further ado, what if you could invest in property but not have some of these problems removed.
What if you could invest and take away
- Time, Expertise and Stress
- Be Diversified
- Sell whenever you want
- Be able to take risk off the table
- Outlay minimal amount
- Invest in many markets at once
- Invest in many assets, not just one asset
A new business based out of Sydney has just launched and it is beginning to allow investors to do just this. While it is still getting it’s feet in the market and building up its portfolio of properties it is something that is very unique and interesting.
To be clear, I am not suggesting in the slightest that this is something you should invest in or consider whatsoever. This is purely an article on a business. The concept behind what they are doing is creating a new investment that did not exist before and that is impressive in itself.
Brickx - www.brickx.com