5 reasons not to invest in property + 5 alternatives

Property. Safe, wise and profitable.

Property. Risky, stupid and money sapping. Well this is my opinion compared to the opinion of many others (above) in reference to property as an investment. Would you still say investing in newspapers in a good investment? What about analogue mobile technology? What about investing in Sony Walkmans? Well maybe not to that extent but I put property up with this list of things to avoid investing in. I hate it. Let me give you 5 reasons why:

1. Negative gearing – what is this? What a dumb concept. Someone pays you money then you pay someone else even more. How about this.. I give you 20 bucks and you give me back 50? Would you do that? What If I said that I’ll give you $15 dollars back at the end of the year? I’ll keep my $20 bucks thanks. Yes it helps in tax… but your only getting a bit back of what you have already spent so you are still spending money.. its not free! Its pure liability and relies on the fact that property prices will forever increase.. yeh.
2. Returns – The returns in the good old days were fantastic. You’d buy something in 1999, sell in 2004 and make a few hundred thousand dollars. Is that really that good? Well it doesn’t really work like that. Say you bought your property for $500k and sold for $1 million… you make $500k.. First the government will take a nice chunk of that depending where your from. That leaves you with about 250k. Then you need to remember that you have been paying interest of about $1000 (approx) per month out of your own pocket which equates to about $60,000 over the 5 years. The there is water, council, strata, water and maintenance. This will probably take the total gain to about 150k. Over 5 years your looking at 30k per year.. This is best case scenario assuming the price doubled. What if it didn’t? What if you invested say 5 years ago? Count your loss.
3. Quality of life – If you don’t have a few hundred thousand stashed away to make up equity in the property (reducing interest payments) then your quality of live over these 5 years would vastly deteriorate. Would you forgo your quality of life and skip the nice things in life for extra 30k a year at most? Worst of all you could never quit your day job! The payments will force you into sticking to a 9-5 as security. Banks don’t like it when you don’t pay so you feel stuck. Your tied down.
4. The Market – The property boom in most developed nations is over. The best returns you could currently expect are almost negligible at best and we will no longer see the returns mentioned in the example above. So why exactly are you in it?
5. Liquidity -  There is no liquidity when it comes to property. Your money goes in and won’t come out unless you go through the full process of selling the investment or you decide to borrow based on equity which will just put you further in debt. There is no residual, regular or passive income. You may be worth several million dollars according to your property portfolio but quite possible can’t afford to pay off your credit card bill or go out for a nice dinner.

As an entrepreneur all the above points make property extremely unappealing to me. The profit and growth margins are minimal, if affects your quality of life, your investing in a dying and shrinking market and there is no liquidity or passive income to either reinvest or to improve your quality of life. Worst of all you can never really quite your day job if that’s where your money comes from. Property will immediately lock you in and make it difficult to break free from the mould.

There is an exception to my thinking and that depends on the reasons you get into property in the first place. If you invest in bricks and mayhem in order to create and build wealth then your a fool. It’s slow, its cumbersome and the returns are only seen many years later, if they are seen at all. If you invest to protect a large income and hoard mounds of cash currently spewing from under the bed, then I think its great.

You may look at the above paragraph and think I’m confused but let me just say this: if you purchase the property and it’s an asset then well done. However if you purchase the property and its a liability then good luck. Negative gearing (the majority) – liability. Positively geared (minority) – asset. Something that you spend money on – Liability. Something that makes you money – Asset.

What are your options? Where can you make good returns in today’s doom and gloom? Well the key I believe is to spread your risk and not to throw all your eggs into one basket (how cliche!). However I will outline a few alternatives that may give you some ideas.

1. Online – Buying – Got a few thousand to spend? There are many websites for sale which can return an extremely good profit and residual income plus unbelievable ROI. You can find top quality sites for sale at places such as the Sitepoint Marketplace. Usually you can get your money back in 10-18 months depending on the revenue model that the site uses. A website with revenue based on advertising should go for about 10-12x its monthly revenue and is a little less secure. Something with a membership base would fetch for a bit more and you may need to pay up up to 18x monthly revenue. I would also look at revenue compared to profit. Work out how much that site will make for you for every month that your not working on it and use that as your basis. For example, for a website with $14,000 advertising revenue per month, returning $10,000 in profit, I would want to purchase something like this for about 100,000 to 120,000 (NOT 140,000 +). Could you imagine purchasing a $100,000 property and it returning $10,000 a month?! No chance.
2. Online – Selling – Got a few thousand less than you wanted to spend? Well one option may be to buy upcoming websites. You can do this via sites such as Sitepoint or finding websites that you like and think you can develop then contact the owners and start the negotiations. There are small improvements you can make in order to increase the value of a site such as improving the overall user interface, fonts, images and revenue model. It’s not uncommon to make 200% – 300% and even more on a website in the space of a few months but you need to know what your doing. If you need some help Max Davis provides some good video tutorials and tips on how to buy and sell websites for profit.  This isn’t a get rich quick scheme but a process on how to buy and sell websites effectively. Highly recommended resource at buying and selling websites.
3. Create – Create something that will improve a current process, then sell it to those who most need it. This is essentially what many entrepreneurs do, day in day out and is a little bit more difficult that number 1 but the rewards will prove must more substantial if your providing value and improving a current process or product. Plus the investment can be relatively small compared to potential profits.
4. Royalties – Invest in software, creating ebooks, music etc that you can give to others to sell and collect royalties. This might be purchasing the rights to existing property such as music and receiving royalties for every sale or use of that item. Once again a little bit more difficult than no.1 but the rewards are passive, continual and substantial. I recently created 6 full length sounds CD’s for sale by various online music companies. I own the product and whenever that product is sold by a distributor then I collect a royalty from it. All I did was create an interesting product and get other people to profit from selling it, with me taking royalties along the way. Its a win-win situation and I do nothing but accept the royalties. Not bad for an $80 investment.
5. The up and coming – Imaging you invested in Google in 1997? Or Facebook in 2004? Twitter last week? There are many agencies that specialise in connecting prospective investors to up and coming start up businesses with potential. Pick and industry that your interested in and look for any new movements or potential and invest early. This is where you stand to gain plenty of revenue through obtaining equity in a successful startup. I probably would not recommend this alternative if you only have a few thousand to spend as its usually reserved for big time investors plus is a bit limited in terms of liquidity. Alternatively you may find some bargains in the business market.

My despise of property is biased. It’s biased as an entrepreneur who can’t stand the time it takes to gain a return as well as someone who has invested in property at a young age and has been subject to the reasons mentioned above. I’m not trying to put you off the investment as you may have done your homework. On the chance you are simply following the status quo and have been groomed to believe that this is the way to go then take a step back and think objectively. What are your goals? Are they short term, long term, income growth, wealth or security? Do your sums according to the current property market. Then finally have a look at the alternatives available which could yield a much greater return on your investment. My aim in this post has been to arm you with some alternate options but of course, It’s your call.