High risk speculative investing….Don’t do it!!

As you would have gathered I have a fascination of watching money/property shows on the old box. Another really good one that has just started a new series is called “Property Ladder” and is the English version of Property Investors trying to make money out of property. But so far I would classify the examples on the first episode which screened last night at 8.30 on Prime as not investors but Developers. YES THERE IS A MAJOR DIFFERENCE!!

I will be writing a series of blogs on this programme, on how I see it and the mistakes some of these people are making. So start watching it!!

This programme has been in production since 2000 and because the property boom of the first part of that decade was worldwide, there were a lot of inexperienced people hopping into property and riding on the back of this boom making good money. Of course booms don’t go on forever, but some people think they do. And this series of the Property Ladder features some of these dreamers who have their heads buried so far in the sand, and big dollar signs in their eyes they failed to spot the easy to read signs that said STOP DONT DO IT!!

Last night’s episode had a young 21 year old girl with incredible drive and vision; her mother had sold the family home to pour the money into her young daughter’s property developments. They purchased an old house and re built and renovated it to create an amazingly nice property.

Here are her proposed figures. Purchase $315,000, spend $75,000 and sell $475,000 Profit $85,000

Her first mistake was she didnt buy the house at discount, and her second mistake was assuming a high selling price instead of a conservative one, and her third mistake was overspending on the Reno. You can put all this down to inexperience and someone who just thought the property market was safe as houses and only went up.

This is what happened. Purchase $315,000 spend $105,000 sell price indications had dropped because of the falling market and lack of buyers, and it was suggested she market the property at $420,000 to $440,000. The aspiring developer ignored the market and the chance to get out break even, (Which can be a lifeline for developers) and she insisted the property be marketed at her original price of $475,000.

The predictable result was that the property sat on the falling market for 2 months with no interest and was not sold. Mother and daughter have now moved into the property and are struggling to pay the mortgage. And obviously the young developer’s career has come to an abrupt halt.

I think the young girl will actually be very successful in her life because of the calm determination she shows, and she will also be richer for the experience, she has learnt a few harsh lessons. But the bottom line is that developing like this is very high risk, speculative investing and if you are going to venture into this type of project try and have low risk margins, and a plan B for the project , in other words an escape plan where you can happily rent the property if you can’t sell it.

Part 2 soon.

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