According to recent studies Sydney property owners made a big mistake selling into a very cold market in the last year. About $800 million in net losses were incurred, pretty big money in anyone’s language. If you own or if you’re buying an investment property, it’s well worth your while to explore this issue to make decisions regarding your portfolio.
The simple fact is that property prices naturally move up and down. Sometimes they don’t do anything, particularly in a tight credit market. Booms don’t last forever. Property investors need to consider all angles in terms of their property values, and plan ahead for contingencies like slow markets or price slumps.
How losses happen
The losses in the Sydney property market need a lot more scrutiny. There are some very valuable lessons to be learned from this situation, and they’re particularly relevant to property investors.
All property owners try very hard, often for years, to avoid taking losses on their properties. Resistance to downward moves in property prices is always very strong.
Losses occur due to several common issues:
- The owners can’t afford to hold the property: This is an absolutely textbook scenario, in which cashflow dries up or can’t match costs of holding property. The property owners are in a rock or hard place situation, in which selling involves taking a loss, but holding could be even more expensive, building up costs.
- Income from rental dries up: If, as many property owners do, you use rental income to finance borrowing, you can find yourself in a very tight squeeze if the property is unoccupied for any significant length of time. Six months without a tenant can compromise a tight budget.
- Property costs: Some “bargains” are only bargains for sellers. If you purchase a property that needs major outlays of cash for improvements or maintenance, these costs can sabotage your investment strategy very effectively. One major building defect, for example, can cost six figures quite easily.
- The local property market hits a slow period: This affects your ability to make capital gains. The “ROI factor” kicks in and many people get out of property investments to free up capital to make better money elsewhere.
- Unrealistic expectations of returns: Some people just don’t do their arithmetic when investing in property. The average increase in mainstream housing prices in Australia is 8% per year, which is just slightly above the median interest rate in recent years and not much more above the CPI. Overestimating returns is asking for trouble, and sellers often lose on this basis, underestimating costs and expecting too much of returns.
Dodging the bullets and avoiding losses on property investments
The best way to avoid taking losses on a property investment is to lock in an investment with a lot of upside and long term capital gain potential. A good example of this approach is one favored by professional investors, who’ll buy an upscale investment property off the plan as a watertight investment. These brand new buildings are less susceptible to broad market moves, because they’re a better class of property, and usually built in high demand areas.
In any market, quality keeps its value. Remember that when you’re looking at your investment options.
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