5 reasons NOT to buy that property

July 7, 2019

Buyers frequently contact us to 'discuss a concept' or 'formulate a strategy' but often what they have done already is to have set their mind on a property prior to seeking advice or having a strategy…and in many cases, the property is a terrible idea.

 

There are five reasons not to buy property and these five reasons can serve buyers well when they want to make a clever purchasing decision.

 

Reason one

Retro fitting a personal and emotional purchase decision into an investment purchase!

 

From holiday houses to properties which university-attending children may live in, from a lost-25 year old's dream being recreated through to a house which one day might be a downsizer's new home, targeting an investment property with emotion is a bad idea.

 

Every sharp investor will agree that there are four key attributes to a great investment property:

 

1. Genuine and sustained growth drivers

2. Rental yield which matches the investor's required cash-flows

3. Tight vacancy rates

4. A quality target tenant pool

 

Take targeting a unit for a pending university student-child as an example; if you cast your mind back to when you were 18 and living with your house-share mates off-campus, it's fair to say you wouldn't necessarily target that demographic of tenant for your own property…plus, it's very hard to take your own children to the tribunal when they mistreat the property or stop paying their rent.

 

Maintaining a pragmatic, numbers-driven approach is vital for any successful investment purchase.

 

Reason two

Chasing negative gearing tax benefits!

 

To claim a tax deduction means that you are losing money. Negative gearing and depreciation benefits are only worthwhile if the asset itself is growing in capital value at a greater rate than the rate of losses which the owner is sustaining and to target a location or asset type which is not outperforming the market, yet is sustaining losses, is a sad tale indeed.

 

Reason three

Helping out a friend/family!

 

Whether it be in the form of providing a roof over a friend's head when they are in need or buying a family friend's property to help them avoid the sale process making a purchase decision with a good-samaritan attitude can have dire consequences - and often for the friendship, not just the financial investment.

 

Helping out a friend is one thing, but making a business decision with them is another.

Buyers need to consider their out-clauses, what-if's, and worst case scenarios before doing business with friends/family as quite often the negative effect on a friendship is far harder to sustain than the financial loss.

 

Reason four

Forward planning by more than five years!

 

It’s really quite difficult to make decisions about where our life could take us beyond a window of a few years.

 

Reason five

Buying it because it's a bargain!

 

Properties are bargains for all kinds of reasons. The key is to work out whether the reason is situational, or physical.

 

Situational can relate to the vendor's timing or perhaps their negotiating position (or lack-thereof) or maybe the sudden deluge of similar properties on the market at the one time.

Sometimes it's as simple as an agent mistakenly booking auction day on a grand final or long weekend when most people are distracted away from property…these situations can be great for a buyer.

 

But, often buyers gravitate to a property because it's a bargain for physical reasons.

 

These reasons can include location (busy main road, opposite an industrial site); difficulty in financing (these types are harder to detect and require research; non-mainstream zoning or title type are the two main offenders when it comes to banks rejecting these types of assets) or, it could be that the property is in a terrible state…the last is forgivable, but the first two are not.

 

Securing a bargain is one thing but if the asset under-performs into the long term as a result of its situation, it was never a good purchase to begin with!

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