Myths about real estate that might catch investors off guard
Common property theories have been identified as potentially leading to poor investment decisions by property investors.
According to John Fitzgerald, CEO of Custodian and author of "7 Steps to Wealth," there are three myths that may be leading investors astray.
“Property investment is not a get-rich-quick scheme,” Mr. Fitzgerald said, “but if I can do it, everyone can,” he added.
He cautioned would-be investors about common misconceptions:
Every ten years, property prices double.
Property investors are likely to hear that their property will double in value every ten years, but this is not the case, according to Mr. Fitzgerald.
“It's true that the median house price in most major cities rises by 8–11% annually compounded, so you're not comparing apples to apples. In the 1980s, for example, the average house was on a quarter-acre lot, or about 1,000 square meters. Mr. Fitzgerald said, "The block of land has steadily shrunk and is now less than 450sqm."
In 1986, the median house price in Sydney was $104,600, and it is now $985,000. The house you purchased in 1986, on the other hand, was 1,000 square meters and 20 kilometers from the CBD. According to Mr. Fitzgerald, it is now worth much more than $985,000.
“So, comparing house prices today to house prices ten years ago does not give you a true picture,” he explained.
The inner city performs better than the outer city.
Many developers want properties that are as close to the city as possible, but this could be a mistake.
“Many investors believe that in order to get a good return, they must buy in the city,” Mr. Fitzgerald said.
“However, inside the inner city, the most common form of property is units, which are not a good way to create wealth.”
Instead, investors are encouraged to look at land-based properties to maximize their returns.
“You need at least 30% land content to achieve real capital growth over a five- to 10-year span, and most units and townhouses are fortunate if the land portion is 10–15 percent,” he said.
“Alternatively, buying property in the inner city is either unaffordable or has a poor cash flow. Investing in the middle and outer city will yield a return that is two or three times higher.
“Land appreciates in value while buildings depreciate, which is why you want to create your footprint on land outside of the CBD.”
The terms "property" and "real estate" are interchangeable.
The most common misunderstanding about land is that it and real estate are the same things.
Mr. Fitzgerald explained, “Property is the land, and real estate is the building component.”
“The land will appreciate in value while the house will depreciate, so you should prioritize purchasing land in the right place. Since land is in short supply, you must concentrate on it.
“If you subtract the land value from the rise in house and land prices over a 30- to 40-year span, you'll find that the land increased by almost three times the median house price and four times the stock market.”
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