One of the first things people need to learn before investing in Property is the difference between 'Investing' and 'Speculation.'
A large percentage of people who get into Property to make money, do not appreciate the difference, and as a result, end up getting burned.
Investment is when you buy an asset. Speculation is when you buy a liability, in the hope it will go up in value enough to cancel out the liability.
Buying off-plan, generally speaking, is more Speculation than Investment. They are sold in huge batches, to people who swallow the marketing spiel, and who honestly believe that they can't lose. For the following reasons:
➤ The property will DEFINITELY go up in value (according to the developer selling you the property).
➤ The rent will just about cover the mortgage each month (assuming there are no void periods, and the rent is a high as the developer is telling you. It never is of course - simple supply and demand dictate that a glut of new identical properties in an area will force the rents of those properties down.)
➤ It doesn't matter that it is costing you money each month, as when you sell it in a couple of years, you will make a fortune. (assuming there is no market crash or dip - oops)
I knew a company who actively encouraged people to use credit card debt to put deposits on off plan properties, as they convinced people in 2-3 years they could sell at a profit and pay off the debts. They no longer operate, and the people who used their system are in deep financial trouble.
Any market dip or slide has major implications for these specualtors, as theprice of their property, and the equity in it, are of vital importance.
On the other side of the coin, I have concentrated on buying assets, the put cash into my pocket each month. The mortgage is paid by the rent, with substantial left over to cover against any voids etc. I will hold them for the long term, so the price fluctuations are of no concern to me. If they go up in value, the extra equity is a bonus, as the reason i own them, is for the cashflow each month.
This protects me against any downside of a propety crash, and is an essential lesson for anyone interested in getting into property Investment.
