When did it become OK to lose money on your Perth investment property?
We made it OK…
I have been investing in property for the last 10 years and during the times of high capital growth property investors including myself made it OK for a property to lose money with a negative cashflow every week. Our justification for this was that we could negatively gear the weekly cost, getting some money back on our tax and the growth in the properties capital value would far outweigh such a small weekly cost.
Negative gearing was fine
While the property market continued to increase we didn’t mind the $5000-$10,000 annual cashflow cost per property property because as little as 1-3% capital price growth would offset it. At the end of the year we would just refinance and cover the cashflow cost out of the properties increased value, we were still well ahead laughing all the way to the bank!
Then the market crashed!
When the global financial crisis hit, it took a long time for myself and many of our clients to see that negative gearing a property could not be sustained. In some cases, not only was a property costing us money each week, but the market value was going backwards and banks tightened up their refinancing terms to make getting any more money very difficult… Ouch!
Insulating your position by actively adding value
I have always invested with a clear plan to add value to property and not passively rely on the market prices to increase. This insulated my position but its still very difficult to subdivide, build, develop and renovate when you don’t have as free access to financing and the market is not uplifting your efforts.
We thought the Perth market was going to recover and make it all OK…
For myself and many of our clients we thought a market recovery would be sooner but 4 years on there are some suburbs and areas around Australia that are still going backwards. The wait and see approach is not what a smart investor would do.
The new rules for investing in property
(1) It’s not OK to lose money every week.
(2) If your suburb is not likely to increase in value and you are not actively adding value to the property it does not make sense to keep the property, hoping for the market to change.
So how can you find out whether your suburb is likely to increase in value?
Just over 6 months ago I started working with John Lindeman (see www.understandproperty.com.au), who is a leading expert in housing market prediction. He developed a suburb property growth prediction model for the banks so they could weigh up the lending risk of a properties value having decreased in the first 12-24 months. The growth prediction model has been shown to have a 94% accuracy!
You can see further details about the reports and order your discounted single suburb report or as little as $50. See full details here.
My decision to sell 3 properties
I have used these reports in my own portfolio to get an independent perspective on where suburb prices are likely to go over the next 12-24 months. In the case of three of my properties the suburbs they are in are predicted to go down in value. Two of the three properties were costing me money every week (1 of them was slightly positive cashflow) and I had finished adding value to all three through renovation, subdivision and building off the plan.
So based on my new rules above for investing in property, it didn’t make sense to keep them and over the last 3 months I have sold two of them with the third now on the market.
Since selling the first property in Huntingdale the market there has worsened and getting out at the time I did was definitely the right decision. Even if I was to do nothing else the decision has paid off. If I now look to buy somewhere that is increasing in value, using John’s reports as a guide (yes many suburbs around Perth are increasing) and actively add value to that property, even after paying sale and buying costs I will be many hundreds of thousands of dollars better off over the next 12-24 months.
Now is the time to make smarter investing choices
If you are losing money on your Perth investment property order a property prediction report and organise a strategy session with me to work through your options. Many Perth suburbs are growing strongly in todays market and many are going backward at the rate of knots, don’t continue to leave your head in the sand like I did… take action now.
Let me know your thoughts below
What tough decisions have you had to make with your property investing? Was this post helpful? Let me know by leaving a reply below.