A research company has put forward what it says are the five worst residential real estate ideas.
So while interest rates are at record lows, don’t rush in too fast into one of the top five worst residential investment ideas according to SQM Research.
The worst five property investment ideas are:
- Cruise ship suites
- Retirement villages
- Mining towns
- Lifestyle properties
- Overpriced off-the-plan apartment developments
Cruise ships sound fun but SQM Research managing director Louis Christopher toldProperty Observer that investing on a cruise ship meant you weren’t buying on any land, and unlike land, boats lose their value quickly.
“It is possible to earn a cash-flow from holiday makers (on a cruise ship) but from what I can see, that type of cash flow return needs to be in excess of 10% net just to take into account this real depreciation. And I am not aware of any cruise ship suite offering that type of net rental return,” he said.
Mr Christopher was even harsher on retirement villages. He said he had never actually seen one retirement village investment make money for the retiree ever, saying investing in them was akin to sucking the financial blood out of poor retirees in the last years of their life.
“The problem with retirement village investment starts with the fact that in most of these properties one is buying into a leasehold arrangement,” he said.
“That’s right, you don’t actually ‘own’ the underlying land. Often the manager behind these estates has complete control over costs and worse, re-sales. Often one has to resell back to the manager or at least sell via the manager for which they of course take a generous fee.”
“Unless you have trucks of money to spend and just want to be around like minded seniors, do not invest in these ‘properties’. You are far, far better off living it up in a hotel!”
Lifestyle investments often tempt buyers, but Mr Christopher said estates focusing on lifestyles such as golfing, semi-rural living or holiday homes are aimed towards exactly that – lifestyles – and fall down when it comes to reliable real estate investment. They can often attract overpriced body corporate fees and management service fees on top of that.
When it comes to poor property investments in mining towns, you can look no further than the North West of Western Australia right now for a prime example. The property prices exploded during the recent mining boom but were completely reliant on that one economic sector, and when demand for iron ore from China dried up, so did the value of property in those mining towns affected.
Finally, buying off-the-plan property can be problematic as well. Again, there’s a great prime example right now in Melbourne as an example, where an over-supply of apartments in inner city suburbs is keeping prices well down.
Being sold the dream of a brand new apartment in an exciting area can mean buyers allow themselves to pay too much for an apartment that doesn’t perform as well as hoped.
Mr Christopher told Property Observer there’s a reason the Australian Tax Office allows for a 2.5 per cent depreciation benefit for these types of properties.
“And that’s because they can depreciate,” he said.