Are you trying to make a quick profit from real estate?

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Most who advocate investment in residential real estate do so because they understand the strong fundamentals that drive our market – much of which I pointed out yesterday. However there’s still this miss-guided perception that real estate can eventuate in quick returns on investment. It’s a myth that’s perpetuated by shows such as Channel 9’s The Block, which intentionally or inadvertently give the impression that ‘flipping’ property for profit is an option for anyone who’s fancies themselves handy with a hammer. However the ‘get rich quick’ motivation that drives this psychology – a motivation we all are prone to– is one of the fundamental reasons it’s a plan designed to fail. The real estate market isn’t a roller coaster of highs and lows where prices rise and drop based on consumer sentiment alone (as with the stock market where speculation is one of the primary forces). Residential real estate is not going to immediately rise in value once renovated. Although presenting a property well, and maximising its potential (extending or adding a second level) will increase the intrinsic value of the home, the time and cost of the work involved is unlikely to make a significant increase on investment unless you’ve been lucky enough to buy just prior to a steep upward curve in the market cycle. The money you spend on the renovation, the time you need to hold the property, and the initial on costs of the purchase, far outweigh the value of a standard renovation added to an average home.

Real estate usually builds wealth in the long term, because the fundamentals that drive the market are based primarily on one thing, and one thing only – mankind’s need for shelter and security. It’s owner occupiers that drive growth in the market, because like food and water, families looking for shelter don’t have the option of bailing out when times get tough. Our population is rising, and the best seats in our major cities have been taken. The housing stock in areas where people want and need to live is not in abundance, and therefore with a rising population it’s logical to reason that demand alone will force the price of well-located residential real estate upwards. However the speed of those price rises will be moderated by affordability. In a two speed economy we will most certainly see a widening split between rich and poor, and as we move forward with the threat of increasing bills, consumer sentiment will play a part in how deep buyers are willing to dig. Therefore if you’re purchasing now with the intention of selling in 1,2 or 3 years’ time, you’d be better off renting and investing your money elsewhere. The ebb and flow of the property market may be tumultuous as we head into a new long term phase of tighter lending regulations and consumer caution, but it will take more than this to take away residents desire to own property. Births, deaths, divorce, marriage, moving jobs, increasing wealth, downsizing, upsizing – the wheel is going to keep turning. However you’ll only safely benefit from if you know what and where to purchase, and have a long term plan.

Catherine Cashmore

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