The Dangers of Buying In Small, Regional Towns
Thinking of buying an investment property in a small regional town
… because it’s cheap?
… because it’s positive cash flow?
… because it won’t cost you much if it goes wrong?
Then you need to make sure you’ve considered all the risks
Hi it’s Niro here from Investment Rise and I recently received a question online.
Karan asked me, “Niro, I’m searching for remote towns for cheap properties priced between 150 to 200 thousand dollars.
I was able to find one for $148,000 which is currently on rent for $280 per week. Seeing as this is a pretty high rental yield for an affordable price.
I’m only 26 years old. I thought this would be a good place to start.
The place I’m looking to buy in has had a decline in population but there’s still a very active community, schools, shopping centres etc. Is that a smart move?
So first of all Karan thanks so much for your question and at 26 to be looking to buy an investment property. Congratulations!
Now the question “Is it a smart move?”
Well you need to ask yourself this.
Yes. from the numbers that you’ve provided it seems like it’s a positive cash flow property.
However the thing that really concerns me is that you’re buying in a town that is remote and it’s also got a shrinking population.
So what happens if that population continues to shrink where by then the vacancy rate starts to increase and you find that your rent starts to drop or you find that you struggle to get your property rented?
Then all of a sudden that positive cash flow property now turns into a bit of a lemon. It’s negatively cash flowed. Plus if the property doesn’t rise in value, how are you going to get your money back?
You see, when you buy an investment property that you might be selling down the track the property needs to rise by at least 5 to 8 per cent to get your money back.
Why do I say that?
Because when you buy a property you’ve got to pay stamp duty and legals and maybe some bank fees depending on your situation.
When you sell, you’ll have to pay real estate agents’ costs. So you need to sort of budget for all that and you’re only going to be able to afford all that if the property has risen by at least that much, as I said between 5 to 8 percent depending on how the numbers work out.
But if you’re buying in a town where it’s remote, it’s got a shrinking population, what’s going to drive prices to rise? If anything I would suggest that prices are going to fall which means that the money that you’ve saved, if you put it into a property, yes it may be a great learning exercise to work out the process of getting a property, dealing with solicitors, dealing with the real estate agents. That’s all fantastic.
But if you end up losing money as a result, how likely is that going to help you in order to move forward to achieve your financial goals?
So Karan I would strongly recommend reconsidering that investment choice because buying something with a strong chance of losing money is never going to be the right way to invest and achieve your financial goals. Yes as I said, it’ll be a great learning exercise and if you happened to go through it and even if you lose money you’ll have a lot more experience.
But there’s got to be an easier way to do it. There is a better way. There are certainly better markets out there. Thanks so much for your question Karan. I really hope that helps in whatever you decide to do. I congratulate you on looking to invest in property and if you have a question that you’d like me to answer, leave a comment below on our Facebook page which is http://www.facebook.com/InvestmentRise.
Leave me a comment. Tag me at hashtag ask Niro #AskNiro. Leave me a question and who knows maybe I’ll be able to answer that in future posts
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