Property investors are being advised that three common myths about property could potentially see them make poor investment decisions.
There are three myths that could be leading investors astray.
It is important to remember that property investment is not a get-rich-quick scheme.
Here are three common incorrect myths:
- Property values double every 10 years
Property investors are likely to hear that their property is likely to double every 10 years; however, it is not true.
It is true that the median house price in most capital cities increases by 8-11 per cent per annum compound, but you’re not comparing like-for-like. The median house in the 1980s, for instance, was on a standard quarter acre block or about 1,000 square metre. That block of land has steadily shrunk and is less than 450 sq m today.
The median house price in Sydney in 1986 was $104,600 and today is $985,000. However, the house you bought in 1986 were on 1,000 sq m and 20 km from the CBD. It’s worth much more than $985,000 today.
So, comparing house prices now with house prices 10 years ago is not providing you with a true picture.
- Inner city outperforms outer city
Many investors look to purchase properties as close to the city as possible, but this could be a mistake.
Many investors think they have to buy in the inner city to get a good return.
However, the type of property within the inner city is most likely to be units, and they are not a way to build wealth.
Instead investors are being advised to look at property with land in order to maximise their return.
In order to achieve real capital growth over a five-to-10-year period, you need at least 30 per cent land content, and with most units and townhouses, you are lucky if the land component is 10-15 per cent.
Alternatively, if you buy land in the inner city, it’s either unaffordable or the cash flow is terrible. You can get a return that is two or three times better by investing in the middle and outer city.
Land appreciates in value while buildings depreciate, which is why you want to put your footprint on land, which – most often – is outside the CBD.
- Property and real estate are the same thing
Perhaps the biggest misconception when it comes to property is that people believe property and real estate are the same thing.
Property is the land and real estate is the building component.
The land is what is going to grow in value, while the building will depreciate, so you need to give priority to buying land in the right area. Land is in limited supply, so that’s what you need to focus on.
If you extract the land value from the growth in house and land prices over a 30- to 40-year period, you’ll find the land increased by nearly three times as much as the median house price.