Ten Reasons You Shouldn’t Invest in Residential Property

I’m a big believer that property investment can be a worthwhile and rewarding experience.

Financially, it can provide excellent longer-term returns through capital appreciation while the monthly rental income can help offset property holding costs. property purchase home

Personally, you can get a lot of satisfaction and comfort knowing that if you’ve invested wisely your property can provide future financial security for you and your family.

However, all this doesn’t necessarily mean you must, should or are ready to become a landlord and undertake what may well be the biggest investment decision in your lifetime.

With ongoing media coverage about the level and direction of property values, strong auction clearance rates, strong median price growth in the major capitals and of course targeted marketing campaigns espousing the benefits of being a property investor, it is easy to get caught up in the excitement and opportunities this type of investment promises.

In addition, many potential investors may harbour the fear of missing out, which property marketers attempt to exploit.

Their argument goes along the lines that if you don’t buy now, you may miss out forever.

However, my advice is don’t get sucked-in by this marketing hype.

Before you commit to becoming a property investor (and I say commit because normally you’re looking at a 7-10 year investment timeline) here are ten warning signs that you might not be ready…

1. You haven’t set your investment objectives

Don’t be a lemming and buy an investment property because that’s what others are doing.  

You should be clear about why you’re investing and what type of return you’re after.

You also have to be ready, willing and able to take on the obligations of being a landlord.

The dangers of not being clear on your objectives include:

You may choose the wrong property

Select the wrong loan product

Not know when to sell

And as result of the preceding points, you could lose money

2. You haven’t researched the market

There are many factors to consider when selecting a property and you should research these by property type and location.

Without adequate research it will be difficult to identify and choose between properties most likely to deliver your investment objectives.

Factors you need to consider include: capital growth potential, vacancy rates, rental returns and the cost of ownership.

Speaking to local selling agents, reading property articles and news feeds and subscribing to property reports from independent research organisations (like www.onthehouse.com.au) are great ways to improve your knowledge and understanding of the markets you’re considering buying into.

3. You’re convinced property investment is a sure thing

I hate to burst your bubble (no pun intended) but there is no guarantee that investing in property will meet your financial expectations. bag money coin deposit saving save house property tax

Prices can go down as well as up and they can remain flat or stagnant for many years.

And remember, the property market can be broken down into various sub-markets including: national, state, suburb and street markets, all of which may interact with and diverge from one another (positively or negatively), depending on what’s happening from a macro or micro economic perspective.

Never assume that investing in property is the right thing to because the only way is up.

This is certainly not the case.

4. You don’t understand your legal obligations

When you invest in residential property you’re not only taking on the financial commitment of a long-term loan, you’re also taking on a number of legal responsibilities.

Some of these include being a landlord, certain tax and reporting obligations or those of a company director if you purchase your property through a separate incorporated entity.

Importantly, you must be aware of all your legal obligations to ensure you comply with the law because if you don’t, the consequences could be severe, such as being hit with a fine or worse.

5. You haven’t set a realistic investment time-frame

Don’t invest if you’re looking to make a quick buck. 14733834_l

Sure you may have heard stories where lucky investors have managed to “flip” (that is buy and then quickly sell) a property within a relatively
short period of time and make a profit (after taking into account all purchases costs including stamp duty), but these success stories are few and far between.

And I think they’re more likely to arise from good fortune rather than necessarily good buying.

As mentioned above, you need to view your investment as a medium to long-term one – at least five years and more likely closer to ten.

This investment horizon provides the time needed to recover your upfront purchase costs (which can add additional costs of anywhere between 3% and 7% to the purchase price) and provide the time needed to ride out any downward trends in the property cycle.

6. You don’t understand property cash flows

If you don’t understand the quantum and timing of your investment property’s cash flow then you’re asking for trouble.

There are numerous stories of highly geared investors getting themselves into financial difficulty because they’ve taken on too much debt and eventually discover they can’t afford to meet their ongoing financial commitments. 14170789_l

And this situation can be exacerbated if they’re negatively geared or if there’s a reduction in their household income where a reasonable portion of that income is needed to support their investment.

So don’t proceed until you’ve prepared a cash flow budget that you understand and that indicates you can afford the investment.

And make sure you flex it to see what would happen in a worst case scenario.

I would also suggest you set up a reserve fund to be used to help cover the unexpected – like an unforeseen major repair bill.

7. You’re not sure how much you should pay for a property

There are two big risks if you don’t know what you should reasonably offer for your investment property.

First, you could end up paying too much (which costs you money) and second, by paying too much you could adversely affect both the level of growth and quantum of any capital gain you hope to make.

In addition, it could add years to your investment timeline whereby you have to wait for the market to catch up to the price you paid, as well as cover all your acquisition costs.

So never put in an offer or sign on the dotted line unless you have a reasonable understanding of what a property is worth.

This is where doing some legwork by attending open houses and auctions, speaking to local selling agents to get a sense of value and subscribing to independent property reports can pay real dividends.

8. You think negative gearing is a way to make money

This is another marketing ploy used by spruikers.

Their argument is you can reduce your tax bill by losing money.

Let’s just think about that for a moment……

You don’t make money by paying less tax as a result of a negatively geared property.

You only make money if you’re able to sell your property for more than you paid for it plus (hopefully) what you paid out in interest and other costs less the rent you received over the period you owned it.

So you should think very carefully if the only way you can afford to buy an investment property is to lose money.

From a loan affordability perspective, ask yourself this question, “What would happen if I lost my job or a big unexpected bill came in?”

Just remember that if you can’t meet your ongoing investment property mortgage payments the benefits of negative gearing go right out the door.

9. Your don’t have the right investment structure in place

If you get this wrong it could adversely affect your personal tax situation including capital gains tax, the property’s overall investment returns and otherwise undermine the achievement of your investment objectives.

It’s therefore important that you focus on things like ensuring your property loan supports your investment strategy and that structure used to buy the property meets your personal, family and of course taxation needs.

10. Going solo

We’ve looked at nine examples where things can wrong, and thinking you can do it all yourself is example number ten. property mistake bad size invest trap house

There are plenty of traps you need to steer clear of, whether you’re a novice or even a more experienced investor.

For instance, you have to be across issues and risks encompassing: financial, property, tax, accounting, legal, insurance and even estate planning matters.

Just bear in mind it takes years of training and experience and in most cases requires academic and professional qualification to be able to understand and/or provide advice on these matters.

You need to ask yourself, do I know everything I need to know?

For most of us the answer is likely to be “no”.

This is why you should always seek independent and unbiased advice before you inves


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Peter Boehm


Peter Boehm was the Finance Editor for Onthehouse.com.au. & has more than 30 years' experience in banking and financial services - Visit https://www.onthehouse.com.au/

'Ten Reasons You Shouldn’t Invest in Residential Property' have 6 comments


    March 29, 2018 James

    I have held an investment property in Adelaide 6 km from the city centre for 11 years from 2007 to 2018 with 80% gearing. The capital gain net of CGT has barely covered the holding costs and the initial stamp duty. The returns have been very poor with the risk and hassles (a return of about 1-2% per annum). All the returns flowed to the banks, the State Government and property managers, whilst I (the landlord) have been subsidising the tenants (the rental income did not cover the holding costs). I will never invest in a rental property again – If a lot of landlords do this – rents will have to go up as there will be less rental properties available for tenants.


      Michael Yardney

      March 29, 2018 Michael Yardney

      James – sorry to hear of your poor results – If you’ve been following my blogs you’ll now understand why I have continually suggested avoiding Adelaide.
      On the other hand, those who bought in investment grade locations have done very well



        April 14, 2018 James

        Thanks for the feedback. The Adelaide property market had a strong growth period from 2000 to 2008 with median house prices up by 2.5 times. From 2008 the capital growth in Adelaide has been low single digits – with all long term investors achieving poor returns. This is similar to the Perth and Brisbane markets. Rents are generally too low and holding costs including wear and tear too high to make a rental property a good long term investment.

        The Sydney and Melbourne market could experience a similar outcome over the next 10 years with low single digit capital growth. In this scenario it would be better to exit now and use the equity as non-concessional contributions to an industry super fund and obtain a hassle-free long term return of between 6% – 10% (depending on risk and whether the individual has <$1.6m super balance).



    February 2, 2018 Terry

    I knew all this but I didn’t fully understand before i invested in property. So let me make it clearer and share some thoughts..
    What you are looking for is a capital gain. That is what property investment is all about and that is one of the things that makes it tricky. Often it is crystal ball gazing by blind advisers.
    Long term means that. Don’t invest if you plan to retire in the next few years or your circumstances may otherwise change like having a baby, just don’t, put as much as you can into super instead and an industry fund at that. It is just too risky in the short term. (Be very wary of a SMSF, keep in mind there is always someone after your money).
    Mortgage brokers aren’t your friends, they don’t have your interests at heart, they are looking for their commission, and I don’t think that they know anything about property investment. They set up mortgages with the banks that give them the best commission, that’s all.
    Banks aren’t your friend, but you knew that DIDN’T YOU.
    Builders aren’t your friend. They are on a price crash them out as quick as they can. Get an independent inspector.
    Being a landlord is a hassle even with a property manager who must spend their mornings dreaming up new charges. High five, lets go to lunch on that sucker.
    Property developers aren’t your friend, beware of them offering to paying a rent while you look for a tenant or any other sweeteners. Do they have trouble selling?
    If the industry is talking up an area, RUN.
    Don’t buy in big developments, you wind up competing with other new landlords for tenants.
    But always buy new. Maintenance is a combat zone. Depreciation is handy.
    Don’t buy apartments, make sure you own the dirt too.
    Stay away from rural and small regional. The bush is dying.
    There are too many poorly regulated ignorant “advisers” out there who may introduce you to a property ( enthusiastically) but then always say that you should get independent advice to cover their thieving kickback arses. They get commission too.
    A loss is a loss!, you don’t get it all back through tax. Cash flow, cash flow, cash flow.
    Now, you can make money investing in property however it is a long term investment and the game is full of sharks. Despite the political hype investors aren’t the bad guys usually they are Mum and Dad mugs. I personally wouldn’t recommend it for the average person. Stay safe, don’t sweat cash flows, invest in industry super and let some other bastard worry.


      Michael Yardney

      February 2, 2018 Michael Yardney

      Thanks for taking the time to leave such a detailed comment.
      In my opinion some of your comments are correct, but I definitely don’t agree with all of them. You must have had some bad experiences
      However I do agree that property investment isn’t for everyone – however those who succeed at anything in life are usually the ones that have failed a few times, learned from their mistakes and gotten up one more time and tried again


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