Many property investors believe they can make a lot of money by investing in property. Bad investments can cost investors thousands of dollars, even in boom markets such as Sydney and Melbourne.
Denny Jones, a graphic designer aged 31 years old, is based out of Sydney. He was 21 years old when he joined the game and believed that everything could go right.
Jones purchased a small studio apartment in the harbour-side suburb of Elizabeth Bay in 2017 for $215,000.
“I was living at home with my parents and I was noticing the average home or unit and how much prices were increasing. So I did the numbers and just thought I needed to get ahead of the market,” he told news.com.au. “Pretty much every day that I wasn’t in the market I thought [the opportunity] was going to get further and further away from me.”
Jones couldn’t afford to pay the deposit, so he sought out financing at 100%. Jones was able obtain a $40,000 loan which was guaranteed by his parents. He used the money for his studio apartment deposit.
Initial rent was $275 per week. Jones realized quickly that the market rent he was receiving was $150 less than his mortgage payments per week. Jones also had to settle fees with the strata every quarter and pay for the unit’s repairs when needed.
Jones rented out $150 per semaine, which was equivalent to $7800 annually. Jones was with the property only five years before it was sold in 2013.
Due to increased competition in the rental market, areas located near capital cities CBDs often have lower rental yields. CoreLogic’s January report found record gross rental yields in Sydney and Melbourne for both units as well as houses.
Jones admitted that his biggest mistake was to not look at his cash flow and how he could expand his portfolio beyond his initial property investment. “There’s that ‘rule of thumb’ that says property prices double every 10 years and I figured that if I was in there for the long term I would probably ride out short-terms falls in the market … I obviously just wasn’t educated enough,” he said.
Fortunately, the studio did go up in value and he ended up selling it for $318,000, giving him a $103,000 profit from the purchase price—but only after spending thousands of dollars covering the rent shortfall and miscellaneous expenses.
Smart investments are crucial for investors
Dream Design Property founder Zaki Ameer stated that capital growth is the most important factor in investing. Then selecting a property based upon projected or past capital growth is one of the biggest mistakes an inexperienced investor makes.
“If you’re buying an investment property, you need to be able to sustain that property. If the property is going to cost you money — when the mortgage exceeds the rent — you need to have sufficient money to pay for that loss. If you don’t, don’t buy it, because you are just putting yourself under mortgage stress,” Ameer told news.com.au.
“You have to ask yourself, can you actually afford the investment property, rather than just buying it and relying on capital growth? If you can’t afford the loan then you should look at a property where the rent does exceed the mortgage repayments.”