You read that right.
We all know how the formula for property investment goes:
- Buy property.
- Wait for the demand to increase.
- Rent or sell.
It’s been tried and tested over decades and many people have testified to its success. But hear us out when we say that this plan in Australia is a recipe for disaster.
Yes, it was possible to buy one house, start an investment journey, and get a return greater than you imagined. But that was in the 80s and early 90s, when house prices were much cheaper compared to now.
Property prices in Australia have skyrocketed since then, and people are struggling to get even one foot in the door with how dangerously expensive property is, not to mention how saturated the market for it is, too.
That’s why 70% of Australian investors buy one property and never do so again. You’d think that if such an investment was a surefire success, they would have done it more than once.
So, what you’ve heard all these years no longer works. The media and ‘property experts’ will tell you otherwise, of course, because methods that have been proven effective are assumed to stay as absolute truths.
But times are changing along with our economic climate and so should our mindsets on where our money should go.
Gearing is borrowing money to buy an asset. Negative gearing means that the income you make from that asset-turned-investment is less than what you’ve spent.
In other words, it means you’re making a loss.
Many will tell you that negative gearing can work. Australian law even has a benefit for those going through this loss— it allows investors to deduct their losses on an investment property from their taxable income.
Those who invest in property normally plan for profit in the long term, so negative gearing will work if an investor can limit their losses until the opportune moment where its value reaches a point where it can be sold for good profit.
In theory, again, it should work. But remember how 70% of Australians buy property once and stop there? Of that number, only 3.4% of properties are profitable.
That small percentage shows that leaving your investment to such a high risk doesn’t always lead to high rewards. With how expensive property is today, you’ll be borrowing and investing so much money with the uncertainty that people will even rent it, let alone buy it.
That short-term loss will lead you to a long-term one.
Paying too much for a property
Ever been excited about buying something that you get so impatient with the whole ‘searching for the right one’ phase? It becomes a matter of “What’s the best I can get ASAP?” because you want it, and you want it now.
The same happens when buying property. You’re finally ready to buy a new house. This is the first one you’re investing in and you’re excited by the idea of getting that huge return of investment (ROI) someday. So you jump from house to house as your real estate agent tries to convince you of their best deal for each property.
And because your excitement builds and builds, it doesn’t take long for you to choose the one you think is the best out of all the options you have.
The outcome? You overextend your budget and end up buying what you can’t afford, with the mentality that it’s fine because you can pay it off later anyway.
Imagine finding out not long after you’ve bought that property that there was a better deal elsewhere. It was a bigger, newer house and you could have bought it for much less.
That’s got to hurt.
The truth is, no matter what we do, there will always be opportunities that we don’t find until it’s too late. What you do to minimise this, is to plan better and to take the time to explore as many options as possible.
Large developers want money
Large property developers are more concerned with getting their builds bought, rather than helping you find the right property. And you can’t blame them: Real estate is business, and business means money.
Picture this: The large developer promotes that they’re going to construct a new apartment. They start selling the units and promise to hand them over once the construction is finished. You buy one and you’re paying for a product that you don’t have yet.
These are big money sinks and it will be years before you can get your money’s worth.
If you don’t manage to pay continuously, you’ll get slapped with penalty payments, or worse, you might not get your apartment and the money you’ve spent on it will be almost impossible to retrieve.
All of this is happening while you pay a huge mortgage that they use to fund the actual construction, and there’s no equity because they didn’t put any of their own money into that building.
So essentially, these developers are making money before you even buy from them. All you’re doing is funding their next big project.
Why new thinking on property investment is needed
3.4% as a success rate for these one-time investments is definitely painful to look at. If so few investment properties are profitable, something has to change.
Negative gearing and overextending sets potential investors up to fail, but large developers don’t really care about that, so they can’t and won’t help you.
And you don’t want to invest in something if you’ll end up having to cut your losses.
There will always be a better option for a better price. Don’t let your excitement allow you to jump the gun, when you could have settled a better negotiation.
How a US investment strategy can result in 10 properties within five years
Our solution to all of this? Invest in the US.
Previously, we explained how for the price of a deposit in Australia, you can buy an entire house in the US. And it can be debt-free.
So if your purpose for buying property is for investment, then it doesn’t necessarily have to be in Australia. Consider your options abroad.
But of course, this shouldn’t be done without a concrete plan of action. That plan is a five-step process called STARR: Strategy, Team, Acquisition, Renovation, Realisation.
Strategy. Having a plan should be the very first step in starting any business. That includes researching where you’ll get the best value for your money. Looking abroad is extra work, but if you want your investment to have a high reward for lower risks, then getting into the nitty-gritty of your plan is something you can’t simply overlook.
Team. Someone has to be present on the other side of the world to oversee things for your investment. The good news is, it doesn’t have to be you. Build an ‘on-ground’ team to do the inspections and deal with the tenanting for you in the US. Find the right people for the job, and you’ll be able to rest easy, knowing that your property is being handled well.
Acquisition. Buying in the right place is important, but buying at the right time is just as crucial. To plan for this, remember the 3Rs: Research, Review, and Redo. Research places in the US that prove to be high-growth locations. Review as many reliable sources as you can to make sure that you’re eyeing the right location. Redo these steps until you’re comfortable with the location, price, and property to meet your requirements and suit your strategy.
Renovation. To find desirable tenants for your property, it might need a makeover. Of course, if you want to attract potential renters or buyers, your property should look its best. Look for reliable contractors to help renovate. With your set team, this will be easier to manage.
Realisation. Realise your cash flow or sale. Properties in the US consistently bring a net ROI of 10-12%. But this can only be a success if you follow the first four steps of the process.
Through the STARR method, you could have a portfolio of up to 10 properties within five years.
If investing in Australian property is an option for you, great and good luck. But for most, it might not be the best idea – at least, not in this day and age where the cost is too high and people can barely afford a decent place to live. What you’ve heard from the ‘property experts’ simply doesn’t apply anymore, and you run a much higher risk of a failed investment.
Investing in the US, where the cost of one American house equates tantamounts to the cost of one property deposit in Australia, is ideal. Following the STARR process, you’ll be able to invest smartly and gain a higher ROI with less risks as opposed to investing in Australia.
To learn more about the benefits of investing smartly in the US, why not attend our live webinar on July 21st. Reserve your seat here.