Common Myths of Property Investment

Being an avid property investor, I've struggled to understand why I encounter so many people who have enough equity in their family home, but haven't bought a rental property. To me it seems like wasted opportunity that makes little sense, but once I started paying attention to peoples reasoning, I noticed five common misconceptions that can hold people back, and I aim to dispel those myths in simple terms below...


1) "It’s too expensive" - We’ve all seen property prices increasing year on year, to the point it seems unaffordable to own more than one home. It is true that saving for a 20% deposit on your first house can be extremely difficult, but once you’re on the property ladder, it gets a whole lot easier, because that’s when your existing property starts to build your next deposit.

For example, New Zealand house prices have risen 35% in the last five years. A first home bought in 2010 for $350,000 would now be worth $472,000, meaning the owner would have the equivalent of a $122,000 deposit for house number two, without saving a cent.

2) "You only average 6% return on investment (ROI)" - While it is true that property prices have averaged a 6% per annum gain in the last 25 years, this is not an accurate reflection of ROI, because a sensible property investor would use the bank’s money, rather than her own.

For example, a $500,000 house increasing in value by $30,000 is a 6% gain, but if you borrowed 80% of the house value, you’ve actually grossed $30,000 from a $100,000 investment, or 30% ROI. 

3) "The aim is to pay off your debt" - Many people look at a 30 year mortgage as a huge interest cost, but a savvy investor knows that the ROI is usually much greater than the interest rate, so more debt equals more profit.

For example, the aforementioned $530,000 house with a $400,000 mortgage at 7% interest would cost $28,000 per year, but after rental income the net cost is reduced to $4,000 per year (1%). This leaves an actual ROI of $26,000 from the $104,000 invested (25% Net ROI). 

4) "It’s all about getting high rents" - Chasing high rent is not the way to build your wealth. It helps, sure, but not if it’s at the expense of  capital growth (the increase in your property’s value).

For example - A $450,000 house that costs $50 per week but increases in value by 6%pa, is a far better long term investment than an apartment that earns you $50 per week rent , but only increases in value by 3%pa. Here are the numbers after 10 years...

House profit = $356,000 growth - $26,000 costs = $330,000
Apartment profit = $155,000 growth + $26,000 = $181,000

5) "It’s the wrong time to buy" - Nobody can accurately predict what the property market will do in the short term, but it doesn’t actually matter. Property investment is a long term game, and history suggests that over the long term, property prices will reliably increase.

For example - If you buy a property today that is worth $10% less tomorrow, you are unlikely to notice any real change, provided you hold onto the property until prices increase again. When the house is worth twice as much in 10 years, you’ll be glad you did.