Property Investment Warning
There are many property investment “Gurus” out there and it seems as if the number of Guru’s are just growing by the month.
I have burned my fingers in the past by using the advice of some of the Gurus and I would like to share some of the mistakes I made in the hope that I can prevent you from making the same mistakes.
I see there is a case at the moment where a guy is accusing one of the gurus that the guru’s advice caused his trust’s bankruptcy. I think this is really low class from the guy to put the blame for his failure on somebody else. I think he is just looking for a way to cash in.
Although there are many gurus selling their many different concepts or ideas it is still up to the individual to decide which of the advice he will follow and not just blindly follow the guru like a heard of sheep.
In my opinion there are no right or wrong guru and there are no right or wrong way of investing in property. We are all different and our circumstances and budgets are different. Not ONE investment strategy can be a “business in a box” solution for all of us. You should listen and learn from each property guru and ONLY apply what fits your profile. In the end it is your money and you future and you must take repsonsibility for it.
You will see that in the post below I say that I do not like buying in new developments. Again, this is my opinion. Your circumstances might differ from mine which makes new developments a better deal for you or you might have better experience in doing your homework thoroughly. So do not take the message below as a rule of NOT doing it.
Back to my warning:
Most Property Investment Guru Services nowadays takes the form of a Guru presenting a course or seminar. Then he is so friendly as to help you setup a trust, he will even act as your third independent trustee. Nothing wrong with this so far. The problem come when he is so friendly as to also source the properties you have to buy for you. People are always looking for an easy and quick solution and here you found a solution where everything gets handed to you on a plate, all you have to do is sign on the dotted line.
Why would a property guru who discovered the secret of bauying thousands of properties with the bank’s money give you some of his best properties so you can buy it instead of him?
Because the properties he offer you are the properties on which he earns a kick back or commission on and many times the guru himself won’t even buy some of the properties he offers to his investment group.
After paying hefty “school fees” I became rather cautious of buying properties in new developments. You will get bombarded with the sales pitch that says that you get it at a better price because you buy direct from the developer and you do not pay transfer fees because you buy direct from the developer.
If you evaluate the price of properties in the immediate area you might find that above sales pitch is bogus.
First of all the developer will not sell you something at today’s price if he knows you will only take transfer (and he gets his money) a year later. He calculated the capital grow into the price otherwise he will loose out. If you look at established properties in the same area you might find that you can buy a second hand property in the same area at 20% less than the new property.
Some people might argue that new properties has less maintenance. New properties also have problems. The bigger the develop the more the problems and the cheaper the materials they use.
The problem with new developments:
Please keep in mind that this is not true for all new developments but you must be aware of these facts before you buy an investment property in a new development.
I learned this expensive mistake (and am still paying for it) when we bought an investment property in Centurion and another one in Gordon’s Bay.
Before you buy a so called investment property in a new development first visit the area and see how many available open space there are for future developments. Also look at the size of the development you are buying into. Never ever believe the property guru or estate agent when they quote potential rental income, never.
Open land:
We once bought a property in a new development. There were two mistakes, the one was that the development was 600 units big the seconds was that it was on the dge of town and was surrounded by open space. The problem with open space is that by the time they finished building your unit 6 other new developments started in the area around you. This floods the market with available properties. I will explain in a moment why this is bad.
We even had this problem when we bought an empty plot in Port Owen some years ago. It looked like a good deal because there are not many vacant stand in Port Owen. But we never realized that a year later somebody will put out 2,000 plots walking distance from the sea just 5 km from there. Those new 2,000 stands destroyed the value of all other empty stands in the area.
Size of development
Think for yourself, if you buy an investment property in a development where they are building 600, 300 or even 200 units, what will happen when they completed those units? Yes, you are right, from the 600 units 400 have to get tenants! Where will so many people get so many tenants so quickly in a development where there are sometimes still contractors on site finishing the last bits?
The first thing that happens is that the Investor who are pushed for cash and who have to start paying his bond will drop the rent he wants just to fill his space. Because he dropped his rent the next investor have to drop his rent even more.
Very soon you will have a new development filled with low income people taking up the bargain of a lifetime paying R1,800 per month rent for a property that cost the investor R600,000.
Besides the fact that this can be very hard on the investor’s cash flow (many of them never budget fr such a big shortfall) this also has a negative influence on the quality of the development. Instead of having a prime development you now have 80% low income earners occupying the development.
This happens with us when we bought Green Acres in Gordon’s Bay from PPI Investments about 3 years ago. There is nothing wrong with the development, it is well situated and it is a quality development. But because of above mentioned fact it is filled with scum bags. The rent is still pathetic to say the least.
In my opinion a development develop a character as it goes on. A new development do not have a character yet. The quality of people who moves into that new development will determine the character of the development.
That is why I would in future rather buy a second hand property in an established development so that you know what the quality of people staying in the development is and what the quality of the management agents are.
Rental Income
Most estate agents and property gurus will lie to you about the potential rental income just to make the sale and earn commission. Before you buy any investment property first buy the local newspaper and see if you can find similar properties to let in the area. See what they go for. You can also contact a RENTAL agent (not estate agent) and pretend that you are looking for a property to rent in that area. If you are considering buying a 2 bed unit in XYZ development, call the rental agent and ask him if he has a 2 bed unit available in XYZ development and what the rent is.
If you are taking the risk of buying into a new development then visit the area. Never buy something without paying the area a visit. Go look if there are shops, bus routes, etc in the area. If there are similar developments in the area find out what the rent in those developments are. Do your homework yourself, do not rely on the estate agent or property guru only.
Never Over Expose Yourself
The so called Property Gurus do not warn potential investors enough about shortfalls and over exposure. When you buy an investment property you must calculate if you can afford a shortfall. If you cannot afford a shortfall do not buy the property. Many “property investors” listened to the property gurus during the past 5 years and now they are struggling to pay the shortfalls. In the end you will get into trouble and will have to sell your property below market value just to get yourself out of trouble.
Wealth Creation | Pieter | February 11, 2010
Hi Pieter,
I think you have some very valid points here. Property developments can be likened in a way to the stock market in a way, in that you will pay a good price for a stall and then it may take the avenue you mentioned, or it could make you more money back than you would ever make on a second-hand property buy. I think property developments are not the best option for first-time investors, but it may turn out well for some. As you say, it is your advice and we are all responsible for our decisions, and it is good for people to be aware of potential problems in this arena.
“The difference is we do our homework before advising our clients.”
I am glad to hear that. Doing your homework is what makes you one of the good guys out there. I know you are not just promoting properties for the sake of making sales.
Hi Pieter, You can be very proud of the fact that you helped me through your e-book to set up my websites. But then, yes I am a so called property guru, teaching people how to create wealth by investing in property. Not all property brokers are bad news. Take you for instance, I really appreciate you as an upright internet business man making honest money, but then on the other hand,how many crooks aren’t out there abusing opportunities on the internet? Same for property brokers. Most deals are for real, but you get your “skelms”.
We sold quite a number of units in the recent past in a large complex on the East Rand. Six weeks after completion, it was fully let with a waiting list at the full rent that we predicted. View it at: http://www.wealthkey8.com/reef-acres-springs.html
The difference is we do our homework before advising our clients. By the way BMT did not work for me, but I did not call it a scam. Keep up the good work! Regards