So you’ve got a few hundred thousand dollars sitting in your account just making 2% interest a year and you’re wondering if there might be something better you can do with it.
You flick through the endless property shows on your TV. Rework this, flip that, add a lime coloured backsplash and bingo, you’re a property gazillionaire. It sure looks easy.
But is it? Let’s take a long hard look at the truth about managing a property portfolio. The potential for accumulating wealth is high but the risks can be sky high too.
It’s not just a matter of buying a house and selling it 6 months later for a song.
Listen to any smart investor and 9 times out of 10 they’ll tell you the same thing: don’t invest in something if you’re not prepared to wait for it to pay off. Investing in property is all about the long game. Go check out a historical graph of property prices: over a ten or twenty year period you’re likely to see a good long term appreciation in value. But property is all about boom and bust. Sometimes it goes up, but sometimes it goes down. And if you’re holding a lot of property a housing market crash can be a gut churning experience. If you’re prepared to wait out the crashes and cash-in on the long term though, you should do just fine.
Costs can be a killer
OK so you’ve got yourself a nice portfolio of properties, you’re making back at least enough to pay the mortgage costs through renting them out to long term tenants, and things seem to be going just dandy. You’re just about to pat yourself on the back for your fiscal judgement when suddenly you get a phone call from the nice young family you gave the keys for 1532 Acacia Avenue: the roof just fell in. As the property owner it’s your responsibility to make sure that roof gets fixed and house repairs can be astonishingly expensive. And it’s not just the unexpected costs which start to mount. Cedar Management Group can help you manage all of the overheads that you need to factor in when you’re sizing up the life as a property tycoon.
Owning a house isn’t the same as money in the bank.
Well sure you only make a couple of cents to the dollar if you just squirrel away your nest egg in a savings account, but at least the money’s just a pin code or at worst a trip to the bank and a couple of business days away. If you invest all of your personal wealth into property you can’t just hit up a cash point and withdraw a Benjamin out of your equity. Even just selling a house can be costly with taxes, fees and realtor charges all adding up. Only invest what you can afford to not be able to access for many years. So those unexpected costs? Make sure you keep a budget to cover them when they occur.
Don’t forget mortgage rates
Mortgage rates are another factor that can look great from the outset but return to bite you down the line. Things can be just fine when the central bank’s interest rates are low but it’s not unheard of for them to reach double figures. And when the prime rate goes sky high, so do your mortgage payments. You could be looking at tens of thousands more on your monthly bill if the rates really rocket, and if you default on your mortgage you can be threatened with foreclosure and, well, you can probably see how things go downhill from there.
Investing in property can be an exciting and extremely lucrative way to use your personal wealth. But don’t be fooled by the endless property shows making it look easy: it can be hard work and the highs and lows can be nerve shattering and not for the faint of heart. So make sure you look before you leap into the housing market and think carefully about whether it’s the right move for you. Good luck!