You can never lose money on property, right? Well, apparently that’s not always the case. Despite the double-digit gains in values across some cities, around one in ten properties sell at a loss. That makes it worth knowing what the people who are making money on bricks and mortar are doing right.
CoreLogic’s latest Pain and Gain report debunks the myth that making money on residential property is a sure thing.
The report found that in the March quarter of 2017, 9.6% of properties nationally sold for a loss leaving their hapless owners out of pocket by an average of $35,000.
That still leaves the overwhelming majority of properties sold for a profit. And with an average profit of $185,000 per sale, it’s pretty clear that if you get things right it’s possible to make big money on property.
So what are the danger zones? The CoreLogic report identified some of the key factors that can increase the likelihood of taking a hit to the hip pocket.
To begin with, over the last 20 years units have consistently been more likely to sell for a loss than houses. It’s the same this year with 13.3% of apartments reselling for a loss compared to 8.1% of houses. That’s not to say units should be avoided. But it does highlight how the land component of a house, coupled with greater opportunities to add value through renovations, can support long-term price growth.
One of the biggest factors that determines whether a property sells for a profit, is the length of time the owner hangs onto the place.
As a growth asset property often delivers the best returns over long-term periods of seven years or more. As evidence of this, properties sold for a loss in the March quarter had been owned for an average of six years. By contrast, houses sold for a profit had been owned for an average of 9 years, or 7.6 years among apartments.
This explains why it is so essential to be prepared to own a property for a decent amount of time regardless of whether you’re an investor or home buyer. Expecting to make a quick buck can be an easy way to get your fingers burned.
Aim to buy in the best location you can afford, and remember that scarcity adds value and market appeal. If you’re considering an apartment look for smaller developments where your unit isn’t one of dozens that are all pretty much identical.
Above all, research the market thoroughly to know if the price you’re paying is fair market value. It’s a lot harder to sell a property for a decent profit if you paid above the odds in the first place.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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