Property investors: not as successful as you think

I’m no genius but I’d bet that you read things online – like this article about the 20 year old with 3 investment properties on Domain.

There are plenty of stories where a young gun “investor” has come out of the woodwork, bought multiple properties, and is now an impressive human being. They’ve become wealthier than you, at a younger age than you, and you should feel bad.

The reality is that most of them are a bunch of flamin’ galahs, and more often than not they’ve used mum and dad’s money to get started. In this article we’ll see just how successful they really are.

Time to break down these silly claims of success. We’ll use this article as an example. The following table is from the article itself.

old-rob

Is this how you’d spend $60,000?

Now there’s nothing wrong with investing and having a go, but I’m going to completely tear this article apart and show you why you shouldn’t feel bad about these bogus claims of success.

Robert, let’s call him Rob, has 3 properties. Total debt: $512K. Total rent: $770 per week, or $40K per year. At a 4.1% interest rate (a decent rate for a casual worker, as of 10/01/2017) the interest on the loans would be $21K per year. That gives Rob a gross margin of $19K.

Now let’s take into account costs. You’d be hard pressed to find a property manager that charges less than 10% of the rent, once you take all expenses into account. The majority also typically charge 2-3 weeks rent for renewing the lease. Let’s assume Rob’s self-managing strategy doesn’t work out (it rarely does) and he decides to use a PM for all 3 properties at a cost of $5.5K per year. As Rob recommends insurance, we’ll also assume he pays a conservative $840 per annum per property for building and landlord’s insurance – a total of $2.5K per year – and we’ll bundle up old mate’s council rates and strata costs together into another conservative total of $4K. Each property will require maintenance, let’s assume a conservative $1.5K per property for routine upkeep (nothing major), so that’s another $4.5K per year. Total costs are now $17.5K each year.

If we include the cost of interest, in our best case scenario Rob will make $1.5K or just $500 per property per year. This becomes zero if interest rates rise to 4.4%.

Now, consider how Rob will feel if just one of the following happens:

  • The honeymoon period on each loan expires and the “discounted rate” is no longer
  • The interest-only period expires and Rob can’t refinance to another interest-only loan
  • The tenants cause damage beyond what insurance covers
  • The tenants stop paying rent beyond what insurance covers
  • The tenants do whatever they bloody well feel like because Rob has no prior experience in managing properties
  • An expensive appliance fails (hot water system, oven, etc)
  • Interest rates rise – banks have already raised rates completely out of sync with the Reserve Bank
  • Tenants move out and one or more properties are vacant
  • Council rates, insurance rates, strata costs, or property manager’s fees increase
  • Rents or property values fall

Notice also that the caption in the table above states that each property’s valuation is based on Rob’s guesstimate. A bloody guess! Realistically he has bought in lower socioeconomic areas (Elizabeth, come on) with no renovation to improve value, and everyone will know what he paid for each property – this information is publicly available. I’d eat my hat if he was offered more than he paid if he were to sell – remember that he offered less than each place previously sold for.

If Rob were to sell now for what he paid, he would get $554.5K, or just $42K after he pays back each loan. After factoring in the cost of selling (good luck finding an agent that charges under 2% commission, or a $5K flat fee, bastards) – Rob will realistically pocket around $30K – half of his investment. Even if he were to sell them for $74.8K as the article states, after the agent’s commission he will break even at best.

What this means is that he would not even be able to pay his mother back the $60K if he sold up today.

You don’t need to invest in property. If Rob had invested $60K in ASX:VTS (US Total Market Index Fund) in September 2014 he would now have $85K + $1.5K a year in dividends (the same amount he makes from his properties). And no debt.

This isn’t a personal attack on Rob – even I was approached to feature in one of these articles once. The writers of these articles – time and time again – deliberately choose not to mention any of the costs. It’s in everyone’s best interests to get the full story.

You bet, there are a lot of these articles going around, and they are all pro-property. It’s the Australian way! But really, who cares. You don’t have to live your life the way people expect you to, and even though I’m a bogan I reckon there’s more to life than being able to tell your mates you’re a property investor!

 

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