Avoiding the property traps
The Australian real estate market offers many options for the budding property investor, but they are far from equal. Many new investors fall into the trap of chasing rental guarantees, stamp duty savings, developer discounts and seemingly high rental returns. However, more often than not these offers are used to disguise what is typically an investment associated with poor long-term growth potential that deteriorates any perceived short-term gain.
In helping investors navigate the potential minefield, here are some of the most common real estate investments that catch even some of the most experienced buyers unaware.
Off the plan:
On the surface, buying off the plan may appeal to the novice investor due to tax benefits and the need for only a small deposit. But further investigation reveals much greater risks that leave many investors exposed and out of pocket.
Off the plan property prices typically include a developer profit margin of 25 to 35 per cent, in addition to high commissions for the selling agent. On a $400,000 property buyers can pay a premium of $100,000 or more above market value. This is a non-transferable cost that far exceeds any stamp duty savings and can take years to recoup in capital growth terms.
Serviced apartments and student accommodation:
These types of real estate are built and zoned for specific purposes and are often associated with seasonal demand and occupant restrictions that significantly reduce the property’s marketability to potential buyers at resale. These assets are also typically viewed by lenders as higher risk and therefore obtaining finance can be difficult, with further implications for resale.
As local and US currencies teeter on parity many Australians are investing in foreign property in hopes of making a quick buck. But as many investors have discovered, buying foreign property is as much a strategy of currency investment as it is property investment, particularly for those financing the purchase of property with their own money. Investing in foreign property is also tricky due to different taxation, investment and property management laws and practices, which makes it particularly risky for novice investors.
With the mining boom in the headlines again, there has been a rush of investors purchasing property in mining towns. Historical trends show rapid growth in the values of properties in mining towns in anticipation of mining activity and equally rapid decline when activity winds down. This is because mining town properties are underpinned by local employment and a transient workforce, making them volatile long-term investments. A growing tendency of developers to construct smaller motel-style properties for fly-in, fly-out workers is an emerging issue for property investors and mining town economies.
Investing in property should be viewed as a long-term commitment reliant upon a strong measurable history of capital growth, rather than rental returns and tax breaks. When investing hundreds of thousand of dollars it pays to do conduct research and obtain professional advice from independent qualified professionals
By Greville Pabst FAPI FRICS, CEO & Director
WBP Property Group