How to time the market perfectly and go broke.
The thing to remember about real estate is that it’s possible to lose money in every market.
Obviously, you’ve got to try a little harder to lose money in some markets more than others. You’ve got to search a little harder for those properties that are going to burn a hole in your pocket.
But they’re definitely out there.
For example, Property Observer was running the story about the recent sale of a one-bedroom apartment in St. Kilda, Melbourne.
The last owners bought it in 2010, and sold it this month. How do you think they did? How much capital gain do you think they put in their pockets over those seven years?
Remember that property has had a bull-tearing run in Melbourne in recent years. Between 2010 and 2017, apartment prices have grown 33%. Houses have grown almost 50%.
And this is a premium studio in one of Melbourne’s premier suburbs. Here’s a picture:
With all the stylish appointments you’d expect:
Built in 1960 it features original timber floors and has its own built-in robes and separate study nook for the bedroom. Stainless steel appliances and tiled splashbacks for the kitchen are also included.
There is also a large living and dining area along with an entry level car space. The property is in close proximity to shops, restaurants and public transport.
So how do you think they did? Have a guess.
The secured $307,000 for the property…
… netting them a capital gain of exactly $0.
Yep. Zero percent growth. Average that out and it’s zero percent a year. Zero.
In a market that’s grown 30-50% in that time frame, that’s a big swing and a miss.
Now look, I’ve got no idea what the story is with this property. Maybe the new owners have picked it up for a song. Maybe the previous owners over-paid in a massive way.
I’m guessing they probably made two mistakes. The first was to over-pay for a fully reno’d apartment, that left them with no room manufacture equity themselves. It looks like future capital growth was fully factored in at the time they bought it.
(Makes you wonder how many buyers of all these shiny new apartments are going to find themselves in the same position a few years down the track).
The second mistake, and their inexperience probably cost them here too, was to take a price that just seems too cheap. I don’t know anything about this particular property, but given the area, it’s about $50K less than what I’d expect something like that to go for.
But look, I don’t know. Could be all sorts of stories going on there. But to me, it reinforces the point that we’re not just playing general trends in the market. It’s not like you’re buying an index fund and just taking broad exposure to market movements.
You’re buying a specific property at a specific price. You can buy well…
And just as this example shows that you can lose money in every market, you can make money in every market. Because we’re buying specific properties at specific prices.
And so I hear it a lot. People who say they wished they had bought into property ten years ago. How they’re kicking themselves because they’ve missed the boat.
But this just isn’t the right way to think about it. I mean, think about the owners of that St Kilda studio. They caught the boat, and it sank.
But really, there is no boat. There is only a market that is continually offering up opportunities to those who can (and know how to!) buy well.
And if you’re lamenting the fact that all the good buying opportunities have gone, don’t beat yourself up either. The hills are still full of gold – for those who know what they’re looking for.
Again education is key. A little bit of investment in the right training can save you from making dumb mistakes and can save you a heap of money, and most importantly, a lot of time.
(7 years is a long time to tie up all that money for no return.)
And sometimes it’s the investments you don’t make that really define your career.
And in that context, timing the market, as this example shows, is almost irrelevant.
Heard of any other disappointing results recently?