January 31, 2013 by Dymphna

Sad real estate mistakes… Then BOOM!

Today I want to tell you a very recent and true story of two of my students, Julie-Anne and Anthony. These two have learned–quite painfully, I might add–what not to do in real estate investing. No, they didn’t do anything horrible or unethical, they just didn’t know what they needed to know to succeed.

I don’t bring this story up because I want to make them feel bad; that’s not what I’m about at all. But I do want to show you not only what happened, but also why it happened, and most importantly, how they ended up succeeding in their real estate investments after they got the education they needed!

Perpetual PPR buyers

Anthony is an engineer by profession and as it happens, his job takes him all over, so they end up relocating about every other year. They are, as Julie-Anne put it, “perpetual PPR buyers.” And it’s true; they kept buying and selling houses.

“I had no idea,” Julie-Anne admitted, “that we could draw equity out of a house without selling it.” It was to be a costly mistake in their unfolding education in real estate.

Well, one year, they decided to actually build their next house. It was in Brighton in Melbourne, and truth be known, it was really more of a mansion–a trophy house to be sure. It was an absolutely beautiful and spacious home. But of course, the next year, they were on the move again. So what did they do?

A big million dollar mistake… Ouch!

They did the right thing…at least for a while. They rented their big beautiful home for about six years, while the value of it rose considerably. But they didn’t want to pay capital gains taxes on the reassessed value…so they sold it!

Here’s where the pain of a hard lesson learned comes in. The house was worth about $450,000 when the built it; today, it’s worth about $1.8 million! They did make some money on the sale of the mansion, but nowhere near the amount that they could have made…

They could have kept the house, leveraged the equity and today be sitting on a sizeable capital gain with a great income stream.

In fact, today their former house yields $1,250 in rents every week or over $62,000 a year! Now, you might not think that’s a lot for a $1.8 million home and you’d be right in thinking that. After all, that’s only 3% on current value… But if you calculate it against the $450,000, a $62,000 return is 12%!

In any case, keeping this property forever would have meant this couple pay no tax on any appreciation and continue to have increased cashflow.

When I quizzed them about all of this, they simply said, “We just didn’t know what our options were at the time.”

Good for them that they didn’t just give up there and then. They kept searching and educating themselves, and put this lesson down as part of the journey.

A flood of new information…

Life is full of lessons, isn’t it? And Julie-Anne and Anthony soon learned another one that could have been easily avoided. But again, if they only had had the knowledge at hand to do so…

After moving about for another few years, they ended up in Toowong in Brisbane because the nearby mining industry gave Anthony the option to remain in the area for the long term. Happy at the prospect of settling down in one place, Julie-Anne and Anthony rented a beautiful apartment for the first two years.

“It was great!” said Julie-Anne. “It had over two acres of parkland, two pools, a gym; it was perfect to watch the kids while they’re out playing.”

They loved it so much that they finally bought an apartment overlooking the parkland. And because it was to be their PPR, Julie-Anne and Anthony spent quite a sum for upgrades in their new home, like expensive floorboards and other improvements.

What they didn’t realize was that the two acres of parkland was an overland flow path. That means that it’s a flood zone, and quite soon thereafter, the Brisbane Flood hit! The parkland was closed and their apartment was underwater. Say good-bye to those new floorboards.

And say good-bye to their investment. There was no flood insurance available because they were in a designated flood zone. The damage to the apartment cost $300,000 to repair. With few renters, they finally sold their $750,000 trophy apartment for just $569,000, taking a huge loss on the property. Another painful lesson learned.

Ticking all the boxes of what NOT to do

  • As this couple discovered twice, they were going about real estate investing the wrong way. Here are just a few of the many mistakes they made:
  • They bought the wrong property at the wrong time
  • They sold property when they shouldn’t have
  • They didn’t know the financial options available with an equity property
  • They bought an uninsurable property without knowing all the facts about it
  • They owned it in their own name
  • They were losing $50,000 a year on it while they owned it
  • They couldn’t financially afford to buy another property until they sold it
  • Lost over $145,000 on the sale

What did they do next? They enrolled in my 1-Day Real Estate Boot Camp. Things went much better from there…

Seeing the light…and great cash flow

After attending my 1-Day Boot Camp, Julie-Anne and Anthony knew what kind of properties to buy, how to buy them, how to hold them and just as importantly, what not to buy.

  • They now live in a house zoned for dual occupancy as their PPR, which they currently don’t rent out, but plan to in the future, which is a very smart move.
  • They also purchased a duplex (a mining reno) that they renovated in only 10-days and now has positive cash flow of $1,038 per week or $54,000 per year!
  • The $20,000 in reno costs returned a $60,000 increase in value.
  • Plus the development potential to grow the cash flow to $100,000 in the property in nine months, which they are doing!
  • They recouped all their losses in only a year and a half
  • Will increase cash flow to $150,000 in tax-free income in less than a year

Happily, Julie-Anne and Anthony are much happier (and more successful) today than they were just a year ago. They have already bought another two other blocks of land to build more income properties.

“For me, the education you provide is crucial,” said, Julie-Anne, “and it helps to be around successful people who do it right.”

“The fact is, we had to take a tough step backward financially, to move forward,” added Anthony, “but it’s been so worth it.”