{"id":859,"date":"2014-07-31T03:29:11","date_gmt":"2014-07-31T03:29:11","guid":{"rendered":"http:\/\/prosolution.echimpsandbox.com\/?p=859"},"modified":"2018-03-08T17:17:25","modified_gmt":"2018-03-08T07:17:25","slug":"it-could-take-you-5-years-or-more-to-get-out-of-a-dud-property-investment-but-how-do-you-know-if-your-property-is-a-dud","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/it-could-take-you-5-years-or-more-to-get-out-of-a-dud-property-investment-but-how-do-you-know-if-your-property-is-a-dud\/","title":{"rendered":"It could take you 5 years or more to get out of a dud property investment. But how do you know if your property is a dud?"},"content":{"rendered":"

Last week a journalist asked me \u201cwhat percentage of investors I thought owned dud investment properties?\u201d It is an interesting question. My answer was that after over a decade of reviewing hundreds of investor portfolios I would estimate that approximately 60 % to 70% of people have a least one dud (under-performing) property. This fact is costing many investors literally hundreds of thousands of dollars in lost wealth.<\/p>\n

I do not think you can ever over-obsess about the quality of your investments assets. Quality is fundamental. My favourite saying is the quality of the assets you invest in will determine 80% of your financial outcomes. It is something we spend a lot of time helping clients to understand. If you invest in the highest quality assets you can find you are almost guaranteed to make a lot of money. So if you are a property investor (or plan to become one), this is an important point so please read on.<\/p>\n

How much does a dud property cost you?<\/strong><\/em><\/p>\n

Firstly, let me clarify what I mean when I talk about a dud investment. Primarily, I am referring to the property\u2019s long term capital growth rate. Investment-grade property should double in value every 7 to 10 years and I have seen hundreds of examples of properties doing this. A dud property won\u2019t achieve these returns.<\/p>\n

You have to hold a property for the long term to see the real benefit of compounding capital growth. For example, at a growth rate of 8% p.a. a $500,000 property will be worth $2.15 million in 20 years\u2019 time. In the first 5 years of ownership the property increases by only $180,000 (or 11% of the total projected gain over 20 years). In years 6 to 10 the property will increase by $320,000 or 19% of the total gain. In years 11 to 15 the growth will be $470,000 or 28% and years 16 to 20 will be $690,000 or 42% (note: it\u2019s unlikely that growth will be uniform each and every year but the average growth over the long term should be close to what I have projected). As you can see, a substantial amount of the total gain occurs in the last 5 years (of a 20 year holding period). But here\u2019s the warning. You certainly don\u2019t want to wait 15 years to find out that your property is a dud and you won\u2019t enjoy these returns.<\/p>\n[Watch this 33-minute on-demand presentation called “Investing in property – no mistakes” by Stuart Wemyss: – click here.<\/a> If you are short of time, skip to slide 5 and listen for about 20 minutes through to slide 15]\n

The second important point is that the cash flow cost of an excellent property versus a dud property is materially the same. You have to borrow the same amount of money to buy it. You pay the same stamp duty and same interest rate. It is likely that you will receive a similar amount of rental income.<\/p>\n

There are two costs as a result of holding a dud property:
\n1.Lost opportunity costs money: This is the amount of lost wealth\/equity as a result of holding a lower than investment-grade property. For example, the difference between a 5% and 8% p.a. growth rate on a $500,000 property in 20 years is over $890,000 in equity. We all have a limited borrowing capacity. This is your scarce resource and you need to allocate it wisely and sparingly. Even if a property is not costing your money each moth (i.e. the rental income pays for all expenses and interest), it is still using up some of your borrowing capacity and that could be allocated to a better quality asset with better returns. If you have the maximum capacity to hold two investment properties, make sure they are the best two quality properties you can lay your hands on. It will make a massive difference in the longer term.
\n2.Lost time costs money: There is one thing you can never replace and that is lost time. The more time you have, the lower the investment risk you have to take to achieve your goals. For example, someone 30 years from retirement has to take very few risks to build sufficient wealth to fund retirement. Conversely, if you only have 10 years until retirement, you have no room for mistakes and you need to get started\u2026 yesterday. Wasting time is the most costly error that compromises many people from achieving their financial goals.<\/p>\n

As you can see from the above two points, holding a dud property is very costly (in terms of lost time and lost opportunity) and I do not think many people realise how significant that can be.<\/p>\n

How do you know if you have a dud?<\/strong><\/em><\/p>\n

The answer to the above question is obvious. You have a dud if the value of the property is not growing in line with expectations for an investment grade property. A better question is \u201chow long do you wait until you know if you have a dud?\u201d There is no hard and fast rule to this as it depends on the circumstances. We spend a lot of time with clients helping them assess their holdings and clients often comment that it is one of the most useful and valuable things we can do. When undertaking a review we will consider (note that this is not an exhaustive list):<\/p>\n