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Stop comparing apples with oranges

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Transcript

Stop comparing apples with oranges. 

If you’re wondering where I’m going with this, trust me, it’s still property. So when it comes to apples and oranges, think of it as you talking to your friends about how your property’s going that you’ve purchased two or three years ago and maybe you’re sharing with each other the results, something very common in Australia. So when you’re thinking about these results, what do they look like? “Hey, so yeah, my property portfolio. The place I bought in Sydney grew by 200,000.” Or you might be going, “Well, now, it’s probably still the same value.” That doesn’t mean all of a sudden that they’re comparable and should have grown at the same rate because one could have a lower yield, and then one could have maybe some experiencing that growth or could have high vacancy rates. There’s so many different factors between why someone might buy a particular property and not just trying to buy it the perfect property each time, but the property that does the job for your portfolio at that time and beyond.

Now this example that I’ve recently heard from a customer, and basically they shared about how one of their friends was talking to them about a property that they bought and it grew by $400,000. So we went through a list of questions. Question one was have the rent increased a lot? So, in this case , the rents hadn’t increased a lot and hadn’t kept up with much of the growth that occurred too. Number two was, was this person negative gearing? Yes, they were and they were forking out a significant amount of money to keep this property afloat and make sure that they maintain their growth. Number three was around are they able to borrow a service more and maybe leverage this growth to go to the next? And when they told me no, that they couldn’t, this has got a few things going to it. So great, you’ve got the growth, everything’s gone well, but you’re losing money to hold the growth, which I’m sure at this stage is being outweighed with that growth considering it’s $400,000.

But aside from losing money, you’re unable to leverage to go again and you’re only going to get that growth in your pocket if you sell. So for now, whilst maybe down the track, rents could catch up, but they haven’t yet, this person is sitting in a position where they’ve had money grow on paper, but it’s not made any impact to their life, any impact to their actual day-to-day living in terms of the cashflow improvements, and they’re not able to actually leverage that growth to take on that next property in their portfolio. So then when you consider it, if you may have got a property that’s different, perhaps hasn’t grown as much, rents may be have increased or improved, then you’ve got more cash flow in pocket, and at the same time you might be able to borrow more to leverage that, yeah, sure, slightly smaller growth position, to go again to add another asset to your books.

Imagine the difference that has. I’m not saying one’s better than the other, but if you’re reviewing the two, they’re definitely an apple and oranges scenario. So before actually comparing the scenario and go through this questions, this customer was considering selling this particular property that they had in their portfolio just because of what their friend told them. So, could you imagine you compared apples to oranges, and now you’re about to make a decision where you go, “I’m going to sell something because it hasn’t grown as much as my friend’s has.”? This is where decisions can start having a lot of emotion, can start taking you perhaps in the wrong direction just because you made a comparison that perhaps shouldn’t have been made as a [inaudible 00:04:00].

So that’s it from us in terms of apples with oranges. Something for you to consider, and make sure that you’re making relevant comparisons in property when purchasing or deciding on something to do with the property that you have. That’s it from us at InvestorKit, the experts in wealth creation, helping you take action.