While ownership is a great vehicle for building wealth, there are a number of common myths that I think we need to challenge.
Cash is king
In an environment where we have been able to secure extremely low interest rates with many mortgages at rates below 2% for some time, the appeal of positive cash flow has continued to grow.
While getting a good rental income is important because it helps you pay off your debt, putting too much emphasis on cash flow can really hurt your portfolio’s long-term prospects.
What I mean by that is that it’s capital growth that ultimately allows your portfolio to continue to grow. If you focus too much on high yields, you may struggle to build a portfolio because you won’t have the equity to buy more properties.
It’s also easy to forget that your rental income typically increases every year. The longer you hold onto a property, the higher the likelihood that it will end up trending neutral or positive. This allows you to buy in much better locations that have a long track record of capital growth while enjoying strong rental income.
There is no doubt that over the past 18 months we have seen a strong push into homes. The reasons for this are obvious as many people were stuck indoors and really needed the extra space to work and manage a family that was cooped up inside all day.
However, you should not overlook the value of a well-located property that includes a smaller land component. What I mean by that is that you can potentially buy in a prime suburb in a small apartment building and actually get a really good land component. These are usually blocks of three to four apartments with their own parking and outdoor space.
Now that home prices have truly become unaffordable for many people, the next obvious place for a homebuyer to look is something a little smaller that still has enough size for their needs.
Anyone can get rich
When the market is hot, everyone is an expert in buying property, and there are a lot of people telling you that you can get rich on property alone.
The reality is that there are hurdles the average person must overcome before they can build a significant real estate portfolio. The biggest problem most people face is ease of maintenance, and that only gets more complicated when you start buying more properties.
Lenders will usually cap your borrowing when you start to reach a higher debt-to-equity ratio, and if you don’t have enough income to start, buying your first property can be a challenge.
I bought my first property when I was only 18, and I was able to because I worked in construction and had a decent income. I wanted a good paying job because I knew it would help me get to where I wanted to go faster.
So while it is possible to build wealth through property, you will have enough income to start and sustain some degree of debt. For low-income people, there is no magic formula.
You can predict the real estate market
When we are in a bull market, it is relatively easy to make money in real estate because the vast majority of the market is up. When things start to slow down, we hear people start wanting to time the market and wait for the right time to enter.
Although everyone is different, there are always opportunities in every type of market. My job is to find the best opportunities for my clients, regardless of market developments. When a market slows down, it gives you more choice and the ability to trade hard. When the market is hot, you have to work incredibly hard to find opportunities.
Either way, there will be buying opportunities if you’re willing to watch. The biggest mistake most people make is sitting around and waiting for the perfect moment, only to miss that moment by never pulling the trigger. Although we can assess the movement of a market, choosing the top or the bottom is an almost impossible task.
Jack Henderson is the founder and director of Henderson Advocacy.
Real estate is a type of real property that refers to any land and its permanent improvement or accompanying structures, whether natural or man-made.