Michael Yardney shares his top 7 property investment tips you should ignore.
Kevin: As investors, it can be very hard to separate the good property advice from the bad. We’ve quite often talked about this. Let’s be honest about it.
There is a lot of advice out there. Most of what you hear, of course, on Real Estate Talk is going to be okay, but by the same token, we have to filter through it. I’ve asked Michael Yardney of Metropole Property Strategists to join me.
Let’s have a look at some of the advice, Michael, that maybe you’d ignore and you might suggest we do the same. Good morning.
Michael: Good morning, Kevin. Yes, there is lots of advice to sort through, to sift through, to filter, and sometimes it is very hard to decide what you should follow.
Kevin: What about buy locally so you can visit the property?
Michael: A lot of people say that, don’t they? You should be able to look at it, you should be able to go past it, you should drive past it. It’s your comfort zone. I can understand the appeal of it, but as the basis of an investment strategy, in my mind, there are lots of potential dangers.
Remember there are lots of different markets around Australia. They all have different growth drivers, different growth cycles, so investment based on just location is important, but not necessarily your location.
Kevin: Yes, you could also be missing out on a lot of great opportunities, as well.
Michael: The markets are so fragmented, that’s exactly what is happening.
Kevin: What about just searching for high yield opportunities?
Michael: We know that there are the two big schools. Some suggest strong cash flow is a great way for investors to go, but in my mind, it’ll never make you rich. There is no way. Cash flow from high-yielding properties, sure, they help you manage your investments, they help your cash flow. But in my mind, it’s capital growth that you require to build your asset base, to build your net worth, and then you transition to the cash flow stage.
Kevin: The next one on the list you gave me, I must admit I pondered over for a while, and that is about investing in the United States because it is so cheap, isn’t it?
Michael: It is. I can think of now probably for 15 years, people have been suggesting investing in the United States because it’s cheap. You can buy a house cheaper than the price of a used car. But I guess you could find those places now in Whyalla or in Moranbah in Australia, as well. There are always cheap properties out there, Kevin.
Kevin: That’s very true, actually. That’s good advice. This next one is a good one. Only invest in properties that you’d live in yourself. I think this is a real big mistake.
Michael: Very much so, and so many people fall for that. The goal is to take your emotions out of the equation by looking at properties that suit that particular market. In some areas, a one-bedroom property is appropriate, and in other areas, it may not be. In some areas, apartments; maybe in other areas, it’s really house and land. I’ve owned many well-performing properties that are consistently tenanted, but I wouldn’t live in them myself.
Kevin: No. What about investing just to take advantage of tax deductions?
Michael: That’s another piece of advice you should ignore. You should never invest in a particular property because of the tax benefits – depreciation, negative gearing, rental guarantees. You’re leaving yourself exposed to changes in the tax rules. We just talked about that in previous shows – about negative gearing. But the main thing is your property should be a growth asset and the tax benefits are really the cream on the top.
Kevin: A lot of people do think that investors are only investors because of things like negative gearing, Michael.
Michael: That’s not really the case. I know that is a strategy that some people talk about, and what we’re saying right now is that it’s the sort of advice that’s fraught with danger.
Kevin: Absolutely. This next one: buy a holiday home that you can personally benefit from. By this, you mean that you’re going to use yourself?
Michael: A lot of people buy a holiday home and use the excuse that “It’s also an investment but I can actually go there along the way. I can use it as holiday time with my family and get two benefits out of it.” I think along similar lines is “I buy this property because maybe in ten years’ time, I’m going to retire into it.”
I think having these mixed uses means it’s never going to be a particularly good holiday home and probably not a good investment. I’d be just using a specific purpose for your property. Have it as an investment. Holiday locations don’t usually make good capital-growth locations. Instead, stay at a new holiday location each year or take a week’s vacation in the best hotel in that area.
Kevin: I can hear the chorus of listeners now saying, “Oh yes, I fell for that one.”
Michael: It’s so common. Again, we’re human and have emotions and needs. We’ve all made these mistakes. That’s why I know these lessons. I’ve made a lot of them myself.
Kevin: I’m so pleased this next one is on the list because time after time, I still hear about people who are buying off-the-plan because they think they’re going to buy at today’s prices to get tomorrow’s benefit.
Michael: We’re talking about the investment tips you should ignore. That is one that if you buy off-the-plan, you’re buying at today’s price. But in fact, it’s not today’s retail price. There are two tiers in the property investment market, and off-the-plan prices are not set by the market; they’re set by the developer, often for as much as he can get based on – often – what overseas buyers are going to pay. Therefore, the real test of a property’s value is when it comes onto the secondary market.
Kevin, recently, we’ve been seeing a lot of properties being sold a year or two after contracts have exchanged at up to 30% below the contract price. You can’t forecast future growth. There are too many risks in off-the-plan. In my mind, that’s a bad piece of advice to listen to.
Kevin: Those are seven pieces of advice that you shouldn’t listen to. I guess that list could go on and on. You could probably write a book about this one. In fact, that’s a good idea.
Michael: It is. All of the mistakes people make and the bits of advice not to take – Kevin, I could easily fill a book with that.
Kevin: I’m sure you could. Michael, always great talking to you. Thanks for your time.
Michael: Thanks, Kevin.