Just because you have the money, doesn’t mean you’re ready to buy a property

I’ve lost count of the number of people who have told me about the tens, sometimes hundreds, of thousands of dollars they’ve lost in property investment deals.

I’ve heard all kinds of stories – someone sold them on an off-the-plan property that ended up with high-maintenance costs; the expenses weren’t worth the minimal returns; some friends recommended a property, but it turns out they were making money off that deal etc.

Property investment deals don’t always end well.Credit: Dominic Lorrimer

I’m not anti-property, but I do think it’s overrated as an investment. Today, I want to debunk some myths – and hopefully save you from some costly mistakes.

Property is not a ‘safe’ investment

First, there’s no such thing as a “safe” investment, that’s an oxymoron. It’s inherently contradictory because all investments carry some form of risk – that’s actually the whole point.

“But property is safer than shares, right?”

Not really. This idea is outdated. There was a time, decades back, when investing in shares involved more risks than it does today. There was no internet (which has driven higher levels of transparency), there were no ETFs (which diversifies your risk across a broader section of the market), there were no online brokers (which allows you to manage your own portfolio).

So back then, there were risks with investing in shares that are less relevant today. Relative to those risks, property probably did seem like a safer option for the everyday person.

Now, the game has changed. I’d argue that today, buying property outright is higher risk than investing in something like ETFs. You take out a massive mortgage (which adds financial risk), to buy a single non-diversified asset (another risk), and have a lot of parties involved – from mortgage brokers and buyers’ agents, to lawyers and accountants (each additional party adding an element of risk).

If you think taking out a half-a-million dollar mortgage is less risky than putting a few thousand dollars into ETFs – you have a significant gap in your understanding of financial risk.

“But it worked out really well for my parents.”

All investments carry some form of risk.Credit: Oscar Colman

I could say the same thing for anyone who got in early with crypto. Luck is not a strategy. Hoping you’ll get the same growth that previous generations got is not a strategy.

With some asset classes, there may be seasons of such tremendous growth that you can get lucky. If you bought property in the 1970s-2000s, you probably did well. When I say “got lucky”, I mean you could put your money in a property with minimal education and still come out ahead. Sure, you could still go wrong, but the market was a rising tide that lifted many boats.

However, the market has changed. Not every property is a good investment. It’s imperative to be an educated investor. You can’t just “wing it” and hope you’ll get the same returns as your parents.

You don’t just need a deposit to get started

There’s an assumption that as soon as someone manages to save up just enough to afford a deposit, the next natural step must be to buy a property. Well, I’m going to say something wild – just because you have the money, doesn’t mean you’re ready to buy a property.

The biggest risk in any investment is not the asset – it’s the investor. Yes, you are the biggest risk to your own investments. The less educated an investor, the higher the risk. Panic selling, indecision, hesitation, fear, poor risk assessment – all that lies in the hands of the investor.

Property is not a beginner-friendly asset. It’s a complicated financial decision with many moving parts. One reason why so many people get burned with property is that they’re trying to jump into a complex financial transaction before they know the basics. They’re skipping kindergarten and heading straight to year 6, just because they have the cash.

They do this because they’re in a rush. There’s so much fear-mongering in the property sector, and an entire industry that financially benefits from you buying a property (from the bank, to the mortgage broker and buyers’ agent), that it’s hard not to get caught up in the frenzy.

So, I’m going to be the rare voice of reason that says: Don’t rush it. Get your fundamentals strong. Streamline your savings, get on top of your superannuation, understand investing well enough that you feel confident investing $5000 before jumping into a $500,000 investment.

Not only will this deliver a financial uplift of tens of thousands of dollars long-term (which will fast-track your ability to save for a deposit), but it will also build your financial skill and confidence. Then, when you take on a bigger risk like property, you’ll probably make a more informed decision, and you’ll be better able to financially and emotionally withstand the pressure.

Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest money through financial education courses and classes.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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