Debunking popular property investing myths (part 1)

Posted by

I was recently at home with my wife, talking about going to the pool. We joked about kids peeing in the water, and I said they have a dye that turns the water red to stop people. My wife said she wasn’t sure if that was actually true, and I insisted it was – I’ve been talking about it my whole life!

We ended up online in fits of laughter as we discovered that it’s a total myth! I’ve believed it my whole life! It just goes to show that myths can get stuck in your head and make you think that something is true, when it really isn’t.

So thought I would debunk some popular property investment myths – here are my first five. Enjoy!

You don’t need a huge cash deposit to start investing in property

If you live in the US, that could be true. As a number of my American guests have said on the podcast, it’s possible to put down a 3% deposit and borrow the other 97%.

However closer to home, in Ireland or the UK, higher deposits are required, because banks are a lot less likely to hand out money.

Speaking personally, in Ireland, it’s almost impossible to get a low deposit, because the Central Bank put rules in place after the 2008 crash. In my time I’ve managed to get a loan for 110%, but those days are gone now. I mean, obviously that’s not free money – you’re giving the bank an amount of hold over your other assets, so it’s wrong to think that it’s free debt, or that you could walk away from the property if it all goes wrong.

So the idea that you don’t need a lot of cash is definitely a myth. If you’re buying, you’re going to need a substantial deposit- in the Irish market it’s 10% for a first time buyer, or 20% if you’re an investor buying a property beyond your first home.

You have to get the timing right

That’s a total myth, in so far as anyone can invest at any time they choose, but it can help your investment career if you time it really well.

By that, let’s say it’s 2012 and you have 100k that you want to invest. At the time, the Irish market was on its knees and you could have picked up a property for about 50% of its value today, if not even less than that. So, timing the market if you want to see a huge increase in your net worth… maybe this is true.

However, timing the market is something that’s incredibly hard to do, and if you decide to wait for a crash until you become a property investor, you’d be making be a big mistake, because you can never tell when the next market upswing is going to be.

House-flipping is easy

This is one I want to knock right on the head! I’ve seen people get burnt by this myth. Back in the boom times house-flipping was an easy and attractive option, because you could put down a deposit to get in line for a property in a new development with an assignable contract, meaning that you would be able to sell it on in the future if you wanted to. So, if the market value went up when the property was closer to construction, you could effectively sell your place in the queue to someone who would buy your contract, making a nice profit.

That’s how it was done before. The benefit was that you weren’t paying stamp duty etc, you were just selling the benefit of committing to a new property early.

It’s been done all over the world, but the problem is that when the market turns and you’ve put a deposit down, you don’t know whether the timing is going to work for you. A lot of people found themselves in trouble after 2008 when they found they wanted to walk away from their contracts but found they couldn’t.

Since 2008 it hasn’t been possible to do assignable contracts. So, it’s a myth that flipping is easy! In the good times it might be easy enough, but in the bad times you could find yourself stuck in a very awkward place.

The first property you buy should be your own (before you start investing)

I don’t agree with this… although it is very typical. The average person will save up for the deposit on their own home before they think about anything else. The reason is that there’s a mindset of rent being ‘dead money’ – it’s the view that if you’re paying rent to a landlord, you’re throwing money down the toilet, and that you’d be far better off buying a property and then thinking about getting into investment.

A lot of people become what I call ‘accidental landlords’ that way – they buy a property, then find they need (and so buy) somewhere bigger. Rather than sell their first property instead retain it and become a landlord almost by accident, because it’s not something they really planned.

It’s a lot different to buying your home after you become an investor. And why is it different? It’s because of the mindset around that idea of renting being a waste of your money.

The reality is that, if I was a first-time buyer (and still renting) and found a sweet deal that was almost too good to be true, which had amazing development opportunities… would you prefer to keep waiting for your first home, or dive into that great deal, giving you a chance to make a stack of cash?

Don’t get fixated the idea of buying your own home first, always look for opportunity!

Being a landlord is easy

This myth needs to be questioned. It’s easy enough to collect money as a landlord when you’re on top of things – it’s passive income. It’s almost like free money because you didn’t have to work 9-5 for it.

However, to say that it’s easy is slightly oversimplifying it. When you become a landlord there are rules and obligations that a lot of people are completely oblivious to. In Ireland, for example, the RTB (Residential Tenancies Board) monitor the rights and obligations between tenants and landlords, and if you fall foul of them there are all sorts and fines and issues you could be liable for.

You need to be crystal clear on what is expected of you before you jump in as a landlord. It’s easy from a passive income perspective, sure, but not if you don’t understand your responsibilities!

So there are my first five debunked property investing myth, tune in for part 2 next week!