What if money and investing was easy to understand?

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What if money and investing was easy to understand?

My newsletter can make it simple. Get my best lessons, stories, and tips each Friday.

Investment property

What it’s really like owning an investment property

Table of Contents

Thinking about buying an investment property? Then read on as I share my experiences owning, managing and selling them.

From the conversations I’m having, if you are under 30 and don’t own one, buying a property is one of your top priorities.

It could be that you're looking for a place to live in, but it's not always easy to find the right place in the right location.

That's why many of us look at investing in property. It seems like the next best thing right?

Terms like ‘rentvesting' are popping up in conversation. This is where you own a property to rent out while renting another property you live in.

End of the day you are a property., which is what you always wanted.

It sounds straightforward to simply want to own a property, but when you look at it from an investment point of view instead of a home then it becomes completely different.

Most people I talk to who are interested in investing in property can be described like so:

  • Earn good money
  • Have their rhythm of saving and spending in a good place
  • Have slowly built a good pile of cash to utilise
  • Read about property
  • Hear stories about property
  • Haven’t had a massive will to own one until recently. 
  • Don’t invest or know their options
  • Have no financial plan

These are the symptoms of the people who reach out to me and say “I’m thinking of going for an investment property”.

After asking a few high level financial questions – what are your goals, aims, attitudes toward money etc – I quickly realise that investing in property isn’t something they’ve been chasing. 

They've just been exposed to seeing it working successfully for someone else.

We have planted it in our minds from outside sources. Friends, family, news, we have seen posts that give an impression of property = asset = success. 

I want to clear up a few things about investment properties and paint an actual picture of what it is and isn’t:

Investing in property is a mechanism for building wealth. It isn’t wealth itself. 

Suddenly buying a property won’t leapfrog you from battler to benefactor. 

You must work at it to make sure it is financially viable. 

Having owned investment properties in the past, I have some take-aways that I make sure are known to those considering an “IP”.

A cold truth about property investment

Have you driven through a new recently developed estate? How about one that was built 10+ years ago?

You'll notice one key difference.

The original planners and developers are long gone. They are onto their next project. It's their bread and butter and know something that we don't all know.

Owning property is not the best way to make money from property.

The best way to make money from property is to sell it. That's why the most successful people in real estate are not owners, but agents or developers.

If investing in property was a better way to make money, every business would be owning property. There is a reason that developers sell their estates off, its because they are not as profitable as developing.

Property is a numbers game.

You need to completely remove all emotion from the situation and make sure the numbers stack up.

You need to know every number in the property, like:

  • Price of property
  • Realistic income you would receive
  • Realistic growth rate of the area
  • Costs of renovations you plan to do
  • Closing costs when you ultimately sell
  • Your outgoings
    • Monthly interest costs (based on the price paid)
    • Recurring costs of insurance, maintenance, strata (if any), rates, property management

Take off all costs from the income received

Are you positively geared? Meaning will you make a profit from the income of your property that covers your expenses?

Don’t fool yourself into thinking “oh but yeah the price of the property will offset all these costs I’m putting in now”. You don’t know what the market is thinking. 

There is no guarantee your property will increase in value.

You need to understand what it takes to own an investment property

To those who are yet to have bought a property – it seems like a total dream.

They might know that one person who bought a place, and it doubled in two years.

Painted the walls and added 30k in value. Have hundreds of dollars coming in each week through rent (an additional income stream).

That's the result of something that takes commitment, understanding and discipline.

1. There are significant costs involved

It’s easy to hear and be told the simple stories. I always try to balance the dream by noting the challenges and phantom costs of property.

Stamp duties, interest from mortgage, rates, maintenance, strata, utilities, things that pop up unexpectedly. Agent costs as well. Plus making sure you pay the right price for the place – undervalued. 

Because this is an investment, you are playing the game of maximising capital growth and optimising income. 

My reason for explaining all this is that there is more work to be done than buy then sell. It’s not a simple equation of putting down $100k, sitting on it for 10 years at a 7% growth rate and take away $200k. 

2. There is a significant time commitment needed

This is will not be a passive investment. 

Before you buy, you need to do your research, understand the market, know what a good deal is and get educated. Property investors aren’t born they are made. 

It gets much more murky than that. Once you buy a property, you also need to commit time and energy to making sure we can rent the property out.

Maybe some renovations are needed or repairs. When it’s ready, you’ll need a property manager to handle the tenants and paperwork ideally. 

You need to keep in touch with the property manager, listen to what the tenants are doing and coughing up money on a regular basis you may not appreciate (new plumbing anyone?).

3. It’s not any less ‘risky' than the stock market

Owning a property is like a business – you need to make a profit.

Not everyone makes money with property. Developers can do it with ease as they have the expertise, foresight and contacts to get them a formulaic return. They go in knowing exactly what they need to pay and what they need to sell for.

I’m not trying to scare people off by investing in property. I want to know all the capacities that it will need your input. 

Futher viewing: 10 Common Mistakes of Beginner Property Investors

There is this thing called Captial Gains Tax

I sold one of my (underperforming) investment properties back in 2019. While at the time I made a profit and recieved a decent amount in the bank from the sale, this was subject to Capital Gains Tax or CGT.

What this means is I had to include the profit I made in my taxable income.

Because I owned the property for more than a I year I got a 50% discount, but even then I was paying a 5 figure tax bill on the sale of something that didn't make me that much over the 10 years I owned it.

There are ways to minimise your CGT bill, like treating the property as your main residence (applicable if you don't own any other place), but in most likehood you will end up paying some sort of amount on your next tax bill.

My tip is to sell when you are expecting to have a financial year of low income, or at least spread the ownership with your spouse if you have.

I'm no tax expert, but there are plenty of considerations to have.

Have an exit plan

I've bought property opportunistically without a plan and even thoguht I personally don't like to plan that far ahead, I think owning an investment property calls for one.

Considering you are only owning it to earn income and make money, then you need to set some guidelines for how it will work in your overall investment strategy.

What if it underperforms? What if you want to use the money from the property to buy your next? How much lead time do you need to sell and have the money ready for use?

Get all this down in writing, even if you change it it will be very helpful.

Owning property is not a financial plan

Do not make the mistake that owning property is a financial plan. 

A financial plan is a game plan that combines your life and your money. It sets you goals and solidifies processes so you can get to live a life on your own terms.

An investment property might be part of that plan, or it might be something else. 

You’ll receive so much more clarity with a plan in place before you buy something life changing like property. 

There are other options than an investment property

In hindsight, I would have happily taken everything I put into my first property and put it into an index fund instead.

Why?

Because I would have sat back, relaxed and 10 years later could have cashed out with similar capital growth to property but without the time, effort and emotion needed to run an investment property. 

Easy to say this is what I should have done as I was under 30 and keen on buying a property. This was all I knew.

So what might I have done differently when buying property?

I would have researched the hell out of it. Finding out:

  • Quality of the property and location
  • What kind of income is possible and realistic?
  • What are the outgoings and ongoing costs?
  • Costs to buy and costs to sell

I would have made sure that the property was part of a greater investment strategy. 

  • Was the focus on capital growth or income?
  • Would I be investing in other ways also (like shares or saving cash)
  • What timeline do I hold on to the property

Your Next Steps

Have I scared you off property forever? I didn’t mean to.

It’s that I see so much written about the positives of owning property and how owning equals wealth. I wanted to show the realities of it and what it really takes. 

If you are passionate about investment properties, then there is possibly no chance in swaying your mind.

I want you to understand that there is more to it than buying and selling. There are other ways to build wealth and assets that avoid chewing up your time and energy.

With a solid financial game plan in place, it can make sense. Understanding your financial goals, your dreams, the life you lead should all be factors in determining what you do. 

Don’t let FOMO or the media determine what you need to do. Make an informed decision and you’ll be close to making the better choice. 

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