While property investing may be simple, it’s not easy and that’s not a play on words, because many investors end up paying a huge “learning fee” or "Stupid Tax" as I like to call it.
A fee that they didn’t expect to pay.
That's because choosing the right investment property comes down to much more than just knowing what you need, knowing what you can afford and knowing exactly what’s available at the time you are ready to buy.
Understandably during the last couple of years with property prices boomed, many novice investors thought or were often led to believe, that bricks and mortar is a safe and easy investments.
Yet many will find out the hard and often expensive way that property investment success is not so easy.
Especially as we've entered a cooling property market.
This adjustment phase of the property market will offer the buyers the opportunity to buy investment-grade properties at a time and less competition, however, if history repeats itself, and it most certainly will, many will make the same classic mistakes and pay the market what I call a learning fee or a"
So, here are 6 “learning fees” I’ve seen investors pay:
1. The "Oops, I bought the wrong property "learning fee"
You buy a home to live in but within a short time it just doesn't "feel right".
Or you buy an investment property and realise it’s a dud.
Did you know that statistics show that 20% of investors sell up their property in the first year and 50% in the first 5 years?
So, you decide to sell within the first year or two and regardless of what price you sell the property for, you need to remember the huge costs associated with buying and selling real estate.
There's the stamp duty when you bought it (plus the stamp duty for the new place), legal fees when buying and selling, selling agent commissions and marketing costs and, of course, the cost of moving twice in quick succession.
This means your learning fee is likely to be tens of thousands of dollars and potentially into six figures when you take into account lost opportunity costs.
2. The "capital non-growth" learning fee
This is the fee that you pay when you buy an investment with poor capital growth because it’s in the wrong city, suburb or street.
Perhaps it grows at 2 or 3 per cent per annum when buying the right property may have achieved 6 or 7 per cent capital growth.
A three percentage point difference might not seem like a lot but over the years this could add up to a learning fee easily in the hundreds of thousands of dollars.
3. The "renovation reality" learning fee
Perhaps you bought a property that needs a significant renovation in the order of 10 per cent of its purchase price.
But then everything ended up costing more than you expected and the project ran over time, which increased your holding costs substantially.
So you ended up sinking about 20 per cent of the purchase price into the renovation and landed in the over-capitalisation territory.
This learning fee could easily cost you tens and tens of thousands of dollars as well as a waiting period of many years as you wait for the market to improve enough to get your money back.
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4. The "I got eaten by a shark" learning fee
Here we have Sam and Susan, a couple of 25-year-olds who charge off to one of those investment property seminars that promise you’ll make a million dollars in six months.
Instead, our bright young things end up knee-deep in cash flow tables, bank documents and (oh dear) a signed investment home contract that results in their off-the-plan, out-of-town, so-called whiz-bang investment property growing at a miserable 1.3 per cent per annum over the next 10 years.
The learning fee in this scenario is especially scary as that "shark advice" could end up being a millstone around their necks for many years.
They may not be able to offload that property without making a significant loss and therefore their future lending capability may be severely compromised.
5. The "buying with emotion" learning fee
You can end up paying this fee in 2 ways.
Firstly, when you fall in love with a property and overpay.
Now while this may be allowed when you buy your home, it’s a big mistake for property investors.
The second way you pay this fee is when you miss out on an opportunity because you have an unrealistic expectation of what the property's price actually is and offer well below an acceptable price.
You then get angry that the vendors are being "greedy" and storm off, not prepared to negotiate at all.
This learning fee here is about your own ignorance and not remaining objective and basing your negotiations on cold hard facts such as recent comparable sales.
Either way, the learning fee you could end up paying is considerable.
6. The "negotiation" learning fee
This is the extra cost to you when you are too afraid or too inexperienced to negotiate on price.
Many property purchasers are “shark bait” to selling agents who are highly trained negotiators who are taught how to get the top dollar for their clients – the seller.
So what should a property investor or home buyer do?
Many of us have been taught to “learn from our mistakes” – but in my opinion, this is too expensive and too demoralising.
Rather than pay a learning fee to the market, why not pay a property strategist to work with you and help design your property investment journey by creating a customised strategic property plan for you
It’s likely to be cheaper as it could significantly reduce the overall learning fee you’d pay to make a mistake.
However, to secure your financial future you’ll need much more than just a property strategist or a buyer’s agent.
My team at Metropole offers a 360° holistic approach to ensure you Grow, Protect and Pass On your wealth.
We customise a solution to meet your specific needs through a time-tested 360° system for acquiring wealth and helping beginning investors buy their first property, experienced investors add to their portfolio and sophisticated investors manufacture capital growth by becoming property developers.
We'll make your investment journey safer by providing direction and clarity in these uncertain times.
Using our services should be regarded as insurance against paying the kind of hefty learning fees I've outlined in the scenarios above.
In life we all pay – the question is how much.