Property as an investment, the honest version

I own four properties across NZ and AU. Two have been excellent investments. One has been mediocre. One is a slow grinding lesson I'm still paying for.

Most of the property content online is written by people selling something. Buyer's agents selling buyer's agency. Developers selling apartments. Spruikers selling courses. Almost nobody writes the honest version where the spreadsheet has bad years and the tenant trashes the carpet and the body corporate hits you with a $14,000 special levy in the same month rates went up.

This is that version.

The seductive maths

Property looks amazing on the way in. Here's the pitch you'll hear:

• Capital growth of 6-8% per year long-run
• Plus rental yield of 3-5%
• Plus the leverage of an 80% loan
• Plus tax benefits via negative gearing and depreciation
• Plus you can live in it eventually / pass it to the kids / etc

Run the numbers and a $700k property with 20% down, 7% growth, 4% gross yield, looks like a 25%+ return on equity in year one.

The numbers are real. They're also incomplete.

What the numbers leave out

Acquisition costs:

• Stamp duty: ~4-5% in most states (waived or reduced for first home buyers in some)
• Legal / conveyancing: $1.5-3k
• Building / pest inspections: $500-1,000
• Loan setup, valuation: $500-1,500
• Buyer's agent if you use one: 1-2.5%

You're 6-8% in the hole on day one. Capital growth has to make that back before you've earned a cent.

Holding costs (annual):

• Council rates: $2-4k typical
• Water rates: $1-2k
• Building insurance: $1-2k
• Property management: 7-10% of rent + leasing fees
• Maintenance: budget 1% of property value per year
• Vacancy: average 2-4 weeks per year on a long-term hold
• Land tax (above thresholds): can be brutal in NSW/VIC

Net rental yield after all of the above is often 1-2.5%, not the gross 4%. On a $700k property that's $7-17.5k of net rent, which the interest on a $560k loan at 6% will eat in about three months.

Selling costs:

• Agent commission: 1.5-2.5% plus marketing
• Legals: $1.5-3k
• Capital gains tax (50% discount if held over 12 months, then taxed at marginal rate)

You're another 4-6% out the door at the back end.

The good years and the bad years

I've had a property go up 40% in three years. I've had another stay flat for seven. Total returns averaged across the portfolio look fine. Returns on any individual property over any given five-year window vary wildly.

The narratives ("Sydney always grows", "Brisbane is the next Sydney", "regional is the smart play") cycle through the property media on a roughly four-year rotation. Each one is true for a while, then isn't.

What's actually true:

• Long-term capital growth tracks population growth + income growth + credit growth, roughly
• Inner ring suburbs of major cities outperform outer rings over very long horizons (30+ years)
• New builds depreciate faster than land appreciates in most cases
• Yield and growth are usually inversely correlated (high-yield, low-growth or vice versa)

Negative gearing, the most misunderstood concept

Negative gearing is not a tax benefit. It's a tax deferral and risk transfer.

What it actually does: if your rental income is less than your interest + holding costs, the loss reduces your taxable income. If you're on a 37% marginal rate and you're losing $10k a year on the property, the ATO effectively reimburses $3,700 of it.

You're still losing $6,300 cash a year. You're betting that the capital growth will more than make up for the cumulative losses by the time you sell.

In a rising market with low interest rates and strong wage growth, that bet pays off. In a flat market with high interest rates, it doesn't.

I run my numbers on a "neutrally geared" basis at minimum. If a property can't at least cover its own running costs and interest at a 7% rate, I'm not interested. The capital growth needs to be the bonus, not the rescue.

The tenant variable

Most tenants are fine. Some are excellent. A few are nightmares.

In fifteen years I've had:

• One tenant who paid late every single month for eighteen months
• One who left a unit so destroyed that the bond didn't cover repairs
• One who was in arrears, going through their own divorce, and turned out to be one of the most decent humans I've dealt with (we worked it out)
• Many who were quiet, paid on time, looked after the place, and stayed for years

A good property manager is worth their fee. A bad one will hide problems from you until they're expensive.

The body corporate / strata variable

If it's an apartment or townhouse, you're partly owned by a committee of strangers.

A well-run scheme with a healthy sinking fund is a non-event. A poorly-run one with deferred maintenance and hostile owners is a slow-motion financial disaster. Special levies of $5k-$50k are not unusual on older buildings facing capex events.

Read the strata report before buying. Read it twice. Get a strata search done by someone who knows what they're looking at.

Leverage, respectfully

The leverage that makes property look amazing is the same leverage that makes it dangerous.

A 20% deposit gives you 5x exposure. Great in a rising market. In a 20% downturn with a margin-call-equivalent (revaluation triggering LMI top-up, or the bank refusing to refinance), you can lose 100% of equity and still owe more than the property is worth.

Negative equity in property doesn't trigger margin calls the way it does in shares. But it does trap you. You can't sell without crystallising the loss. You can't refinance to a better rate. You're stuck.

The blokes I know who've gone seriously backwards in property all over-leveraged. Multiple properties at 90% LVR, no buffer, dependent on continued price growth to stay solvent. Worked great until rates went from 2% to 6%.

When property makes sense

Property makes sense when:

• You can afford the holding costs without depending on capital growth
• You're holding for 10+ years minimum
• You've bought in an area with genuine long-term fundamentals (jobs, infrastructure, population)
• You're not over-concentrated (one property is most people's biggest single asset already)
• You can sleep through a 20% paper drawdown
• The structure (personal vs trust vs SMSF) actually fits your situation

When it doesn't make sense:

• You're stretching to afford it
• You're chasing a hot market or a yield play in a town you've never visited
• You're using it to "leverage your equity" recklessly
• Property is the only asset class you hold

What I'd do differently

If I were starting again at 30 with what I know now:

• Buy fewer, better properties (not more, average ones)
• Inner ring of major cities, even at lower yield
• Keep more of my wealth liquid in ETFs
• Run the numbers at 7% interest from day one
• Hold a 6-12 month buffer per property
• Use trust structure earlier
• Walk away from any deal that doesn't stack up with sober assumptions

Property is a great wealth-builder for the patient and disciplined. It's a decent way to lose money for the impatient and over-leveraged.

Run it sober.

Not financial advice, talk to an adviser before acting.