There are a lot of reasons you should invest in property but it isn’t for everyone. Here are 14 reasons you shouldn’t invest in property.
There are a lot of reasons you should invest in property, like being able to leverage your money, get capital growth, get passive income in the form of positive cash flow. But there’s also a lot of reasons you shouldn’t invest in property. Here’s 14 reasons why you shouldn’t invest in property.
Hey, I’m Ryan from onproperty.com.au, helping you find positive cash flow property. Believe it or not, property isn’t for everyone. And there’s a lot of reasons why you may or may not want to invest in property. I’m going to go through 14 different reasons you shouldn’t invest in property. 5 of which are personal reasons. And then, 11 of which are investment reasons. So let’s go through the personal reasons first why you shouldn’t invest in property.
The first personal reason you shouldn’t invest in property is you don’t have the money. It’s a lot more expensive to go ahead and invest in property than it is to invest in something like shares. Shares, you can potentially start investing for as little as $500 or $1,000 to start your share portfolio. When purchasing a property, you’re going to need at least a 5% deposit. Plus, you’re going to need to cover a bunch of costs. So, maybe around 10% of the purchase price.
If you’re looking at a $300,000 property, you’re looking at $30,000 as a minimum to get into the market. So, if you don’t have a deposit, if you don’t have the money to invest in property, it’s going to be very difficult and you may not want to invest in property. You might want to pursue something else until you do have enough money.
The second reason you should invest in property is that you can’t get a loan. Now, if you can’t get a loan for a property, it’s going to be very hard to purchase one. Properties are extremely expensive. We’re talking $300,000, $400,000, $1 Million. A lot of us don’t have that sort of money in the sock, under our pillow. We would need to borrow money from the bank in order to get that.
Now, if you don’t have a steady income, if you’re not full time or part time, if you don’t have a business where you can show at least the last 2 financial years in terms of what you earn and you earn a decent wage, then it’s going to be very difficult to get a loan. If you can’t get a loan, you probably can’t purchase a property. So I recommend going ahead, speaking to a mortgage broker first to find out whether or not you can invest in property, whether or not you can actually get a loan. Because if you can’t get a loan, you’re probably not going to be able to buy a property.
The third reason you shouldn’t invest in property for personal reasons is you don’t know much about property. You just talked about it with your friends over a barbecue or you saw the Melbourne and the Sydney market boom and people make $100,000 or $200,000 seemingly overnight. And you think, “You know what, I want to get myself a little bit of that action. I wouldn’t mind $100,000 in 12 months in terms of capital growth on my property. I’m just going to jump in and buy something.” But if you don’t know much about property, you don’t know about the process. You don’t know how to research an area.
You don’t know about mortgages and all of this sort of stuff. Then, you may want to hold for a little bit. Start doing some education. Start reading up on these sorts of things to get an idea of the property market before you go ahead and invest. The best book that I recommend for anyone who wants to educate themselves is Steve McKnight’s book, “0 to 130 Properties in 3.5 Years”. Now, that book is getting a bit old and so some of the strategies of purchasing that many properties in such a short period of time may not work, but this book goes through all the fundamentals. It goes through cash flow situations.
It talks about high level investment strategies as well, so it’s a great book for starters. So go to onproperty.com.au/130 and you can purchase that book online. Get it shipped out to you, which I found is the easiest to get it. So, if you’re uneducated, you probably shouldn’t invest in property. You should get educated first.
The next reason that you don’t want to invest in property is that you struggle to manage your own finances. So if you’re struggling to manage your own cash flow, you’re spending more than you earn, which, let’s face it, most of us do. And you really struggle to understand a lot of things to do with finances. Things like managing your taxes. Things like credit card interest rates. Things like not spending more than you earn. Then, putting a property on top of that may be too difficult for you. And so, it may not be the best option for you. You might want to focus on improving your understanding of your own finances.
Getting a better handle on that and then going ahead and purchasing a property. However, I do believe property can be a great way to learn about finances. And so, if you’re willing to take the risk and you’re willing to go ahead and learn as you do, and potentially make some mistakes along the way, then this probably shouldn’t hold you back. So, it may hold you back or it may not. It depends on exactly who you are.
The fifth personal reason, and the last one, that you probably shouldn’t invest in property is that you’re fearful of debt. I don’t mean like you don’t really like debt, but I mean like you downright don’t want to have any debt. Because, again, this comes back to number 2 – for people who couldn’t get a loan. You basically going to need to go into debt in order to purchase property, unless you got an inheritance or you’ve won the lotto – in which case you probably don’t even need to invest in property. But, anyway, you’re probably going to need to acquire some debt in order to be able to purchase these assets. And so, if you’re scared of debt, fearful of debt, something that you want to avoid at all costs, then property may not be your best investment vehicle.
Now, I want to go into 11 investment reasons why you shouldn’t invest in property. This may sound strange coming from someone who runs a property investment blog and someone who believes that property can be great investment vehicle if done correctly. However, there’s 2 sides to every coin and I think it’s good to be aware of some of the reasons you shouldn’t invest. Some of the negatives of investing in property so you can make an educated decision about what is best for you.
Because property is not the best investment vehicle for everyone. It may be business. It may be shares. It may be a bunch of other different things. Property may not be your thing. So let’s go ahead, let’s have a look at the 11 investment reasons you shouldn’t purchase any property.
Number 1, which is actually number 6 on our list, is your cash is not very liquid when you purchase a property. When you purchase a property, you’re going to tie up a lot of cash as well as the debt that you’re getting in to into one asset. Now, that asset isn’t extremely liquid, which means you can’t get access to that cash relatively easily. If you go ahead and you invest in shares, put $1,000 in shares, you can basically turn around that same day, re-sell those shares, get your money back. That’s how day traders do these things, I think. I don’t know. I’m not a day trader myself, but people are in and out of the share market really quickly.
Whereas with property, you got through the process of listing your property, getting professional photos taken, holding open houses, getting offers on the table. Then, you’ve got to go through cooling off periods, signing the contract. Then, you’ve got through the waiting period until settlement. So, even if you go ahead, list your property, sell it that day, it could potentially be 4 or 6 weeks until you get the money and the property is sold.
So, your cash isn’t very liquid in property and in a lot of areas, it can take very long to sell your properties. In rural areas, it can be up to a year or more to sell a property. In city areas, it’s a lot shorter than that. You’re talking a couple of weeks to a couple of months there. Just know that you can’t really get access to your money really quickly unless you’ve been smart with your finances, you’ve got a lot of equity and you’ve got ability to access that equity through increasing your debt, that’s a different story.
The number 7 is that you need to go into a lot of debt to purchase a property. So this is one of the investment reasons you may not want to invest in property is that you need to go into a lot of debt. Now, debt can be great because you’re leveraging the money that you do have to buy a bigger asset, which if it grows, you can make more money.
However, if the property goes backwards, you can lose a lot more money as well and you’ve got this debt that you now need to service. And if you don’t have high enough rent or if your property is vacant for a period of time, that can put a lot of pressure on you. So you may not want to invest in property because you will need to go into a certain amount of debt in order to do it. Unless, like we talked about previously, you have a large inheritance or you’ve just won the lotto. In which case, good on you.
Congratulations. I never buy lotto tickets. I worked on a lotto counter for years and it’s just such a rare chance of winning that I made the decision I’m never going to buy lotto tickets. The money that I’ll make, I’ll make myself. I’m not going to leave it up to chance. And so, that is not me. I’ll probably have to go into debt to purchase my properties and you’ll probably have to do the same.
Reason number 8 is that it’s expensive to buy and sell properties. When you’re purchasing investment properties, you generally need to pay capital gains tax, as well as some other fees that go into purchasing that property. No, when you’re purchasing, you need to pay stamp duty, not capital gains tax, sorry. When you’re purchasing a property, you’ll likely need to going to pay stamp duty.
This is a government fee that you need to pay when you purchase the property, which can be quite significant in value. When you sell your property, you’re going to have to pay commission to the real estate agent in order for them to sell your property, unless you do it yourself.
Which, let’s face it, most of us aren’t going to do that. So, when it comes to buying and selling property, it can be extremely expensive. It’s not like getting in and out of the share market. You’ve got to pay large fees when you sell. You’ve got to pay large fees when you buy the property. And so, this can be a reason why you shouldn’t invest in property.
Reason number 9 is that it can often take years to see a return on your investment. The stock market can go up quite quickly or you could get dividends every quarter. It may take you years for your property to go up in value.
Especially if you’re purchasing a negatively geared property where you need capital growth. You may be paying money out of your pocket every single month towards this property and it may be 3 years or more before your property goes up in value enough that you can actually see some growth in your property. And it may be even more years before you can actually access that through drawing down on your equity or through turning your property into positive cash flow.
This is one of the reasons I love positive cash flow because it doesn’t take years to see a return on investment. Sure, you’re not going to get huge gains in cash flow that you’re going to see in capital growth. However, you can get a return on your investment almost straightaway, which I absolutely love. It gives you more money to go and invest again. That’s another negative of investing in property – it can take years to see a return on investment. If you want a quicker turn around than that, then property probably isn’t for you.
Number 10 is it can cost you money just to hold the property. I just talked about it, but negatively geared properties cost you more in expenses than you are making in rent. Especially in some areas where the capital growth and the value of properties has gone up so much but rents haven’t kept up. You’ve got really low yields in some areas, as low as 2-3% yield, which is extremely low. Even 3%, 4% yield is still quite low. In most of those cases, you’re going to be negatively geared.
Which means every single month you’re paying money to hold an investment and you’re hoping that investment’s going to go up in value and offset those losses that you’re having. But in the meantime, that can put massive stress on your financial situation.
It can make you cash strapped. If you lose your job and you still need to pay for this property, that can be really difficult. And so, that’s one of the reasons you shouldn’t buy property is that it can cost you money just to hold the property. On the flip side, that’s one of the reasons, again, that I love positive cash flow or neutrally geared property is that if your situation changes, it’s giving you that return on invest. It’s giving you that cash flow. It’s not trying to suck it from you when you don’t have anything left to give.
Reason number 11 you shouldn’t invest in property is that capital growth isn’t guaranteed. A lot of people talk about how they should invest in negatively geared properties or they should invest in capital cities because they’re going to get epic capital growth and you’re going to make hundreds of thousands of dollars, but that’s never guaranteed. There’s always the case that the property market may go down. There’s always the case that it just may stagnate and not grow at all. There’s always the case that you could overpay for a property. And so, even though it does grow, it’s not catching up to what you actually paid for it. And so, capital growth in your property isn’t guaranteed.
It’s not a set rate of 4% that you’re going to get every year for the next 20 years. It comes in bursts. It comes in spouts and may be stagnant for 5 years, jump really quickly then it may decline. Then it may decline then it may stagnate again then jump again. It’s just all over the place. It’s not guaranteed. It’s not definitely going to happen. So, if you want a definite return on investment, investing in property for capital growth isn’t something that is guaranteed.
Reason number 12 is that there can be large expenses when owning a property. If you purchase shares, then you’re probably going to get dividends from those shares. And chances are, you’re not going to have to put any money into those shares ever again. That will just sit there, you got shares in that company now.
If the company does well, great. You make money. If the company doesn’t go well, then you lose money. But the company is not going to come to you and say, “Well, we need to pay our employees this month, so you need to pay us X amount of dollars.” or “Something broke in our building and so you need to pay for that.” or “We need new computers for our employees, you need to pay for that as a shareholder.” That’s just not going to happen. But with a property investment, that can happen.
You could have a tenant in there and the hot water heater breaks. And all of a sudden, you’re out $2,000. You could have a leaky roof and you got to pay $10,000 to get it fixed. There are a lot of things that can go wrong in a property that can be really expensive to fix. So, one of the reasons you shouldn’t invest in property is that there can be large expenses that you need to pay for. If you don’t have a buffer fund of money where you can afford to pay for a broken hot water heater or these expenses that may come up, then maybe you shouldn’t invest in property.
Reason number 13 is that it’s expensive to get started. We talked a bit about this in the personal reasons; if you don’t have the money. But one of the negatives of the investment reasons is that it’s expensive to get investing into property. You can’t just dip your toe in the water, give yourself a go at property investing. Invest $1,000, $2,000 and just see how it goes and if it doesn’t work out, you can just exit or you’ve then lost $2,000.
It’s expensive to get into the property market. Sometimes, it takes years for people to save up a deposit in order to invest. So, one of the reasons you shouldn’t invest in property is that it’s super expensive to get started. And on top of the large portion of money you need to put in, which is going to be a big chunk of your savings, I’m sure. You’ll also going to have to get all of this debt so you can purchase something that is extremely expensive. So that’s one of the reasons you shouldn’t invest in property.
Number 14 is that ongoing management of your property is generally required. Even if you’ve got a property manager, when things break, they’re probably going to need your word on it whether they should replace that air conditioning unit or if they should just get it fixed or whether you should take this action or that action. So property is very rarely going to be completely passive. There is some work that you’re going to need to put in to it.
You may need to do some paperwork every year in order to do your taxes and things like that. So, there’s ongoing management that is required with your property investments that you wouldn’t have in order investment vehicles. However, the ongoing management generally isn’t huge, especially if you’ve got a property manager that is going ahead and helping you out.
So there you have a whole bunch of reasons why you shouldn’t invest in property. I’m sure there’s a lot more reasons why you shouldn’t invest in property, but that gives you an idea of some of them. Look, I hope I haven’t turned you away from investing in property because I still think it can be a great investment if you know what you’re doing. You can get capital growth, which is leverage growth, which means you’re going to make significant amounts of money.
You can get positive cash flow if you invest smartly. You can even create equity or create growth by doing things like renovations or subdivisions or dual occupancies or putting a granny flat on the back. You could increase your rental income and your cash flow even more.
I love property because there’s so many opportunities that you can do to improve your investment and to get a better return. Whereas if you purchase something like shares, you don’t really have a say in what that company does, unless you own a huge portion of those shares. That’s one of the things I love about property. Property just has so much opportunity if you know what you’re doing. So I think it’s a great investment.
However, there’s some reasons why some people shouldn’t invest in property. I’ve shard them with you today. Now, it’s up to you to decide whether or not you think property is for you or whether or not you should go out there and you should seek out another investment vehicle.
If one of the reasons you’re not purchasing property is that you’re just overwhelmed by the whole thing and you feel like you want some help in finding a good area to invest in, finding a good property to invest in that you can potentially improve through minor renovations or something that’s in a good area that’s likely to grow. Something with neutral cash flow or positive cash flow. If you need help, someone to hold your hand and guide you through the buying process, then I am working with Ben from Pumped on Property who’s my buyer’s agent of choice.
He’s helped a lot of On Property listeners to find great properties. And he’s offering On Property listeners a free strategy session with him where you can get clear on your goals and what you want to achieve. You can set out a path that you can follow to invest in property and to achieve those goals.
If that’s something that you’re interested in, you’re interested in getting someone to help you and you’re interested in a free strategy session with Ben, then go to onproperty.com.au/session to ahead and request your free strategy session over there.
Thanks so much, Ben, for offering that to our listeners. I know a lot of people who have gone through that and just got clear on what they want and they’ve been able to move forward. A lot of people have worked with Ben and seen great results. So, again, that’s onproperty.com.au/session. That’s if I haven’t completely turned you away and you never want to invest in property ever again.
I’m Ryan from On Property. I wish you all the best and until next time, stay positive.