Emotions can play a big part when investing. It’s easy to let our emotions and our biases get in the way when making investment decisions.
Compare two residential investment properties in the same street in the same suburb. They’re both for sale at the same price and both return the same weekly rent, however, one’s a beautiful old Queenslander and the other’s a brand new run-of-the-mill apartment. It might be easy to be taken by the charm of the Queenslander and think to yourself – It’s going to be easy to rent because I’d like to live there, therefore, everyone will want to live there, and, it’s going to be easy to sell because it’s so charming – so I should get more money for it when I go to sell it. Well on that point if they both sell for the same amount now, then that’s what they’re worth – this charm has already been factored in. There’s also no evidence to suggest that the charming old house with a back yard and a BBQ will sell for any more than the unit in the future – in fact, over the last ten years, inner city unit prices in Australia have outperformed house prices in nearly every capital city.
On the first point of ‘being more likely to rent’, again, we’ve already established what the going rate is. But when it comes to calculating the NET yield, it’s likely that the old Queenslander would probably have higher annual maintenance costs, such as, gardening, painting, fixing fences etc, and there is most likely no depreciation claimable because the property’s over 40 years old. These factors alone can mean as much as $10,000 to $12,000 per year in additional holding costs for the old Queenslander. And long-term the old house may incur more significant restoration costs such as replacing the roof, bathroom or kitchen, repairing termite damage, or even restumping.
Investing is all about analysing the numbers and future growth drivers. It’s important to separate your lifestyle choices from your investment choices.