Letter from the editor: Opportunity cost is one of the biggest risks

Letter from the editor: Opportunity cost is one of the biggest risks
Letter from the editor: Opportunity cost is one of the biggest risks

Any time someone in my family buys property, I know about it. Property fever is in the air regularly in my extended family – I have cousins who are real estate agents, many of them invest, and a few of them have also recently become first home buyers themselves. I am no stranger to the excitement that buying property causes.

Even my parents are in on the action. They are currently in the process of designing plans for a newly purchased block midway between Canberra and New South Wales. It’s a 10 plus hectare land plot that I visited with them on a road trip when back on my last trip back to Sydney, and I absolutely fell head over heels for it.

They’ve bought into the second stage of a rural subdivision and have picked a block that’s conveniently bare save for a few distinctive boulders and trees, largely flat and has a creek running through one end. It has views all the way over the little town that it is adjacent to. Their home plans are also impressive – with a beautiful verandah, a huge kitchen and walk in pantry, energy efficiency measures and an entertainment wing with a sunken snooker table and cinematic-style projector room. It’s essentially their dream home – the property they’ve been planning for years that saw them selling out of Sydney’s north west and hunting for their final nest.

The effect that seeing this had on me was fairly immediate. My initial reaction was to want to know everything about the property and the process. The settlement was painfully slow, and I wanted to know why. Later, they found the land being used for agistment by local farmers, and I listened in on the hilarious attempts of my parents to move cows from their plot so they could wander around. Daily, I’m told plans that they have for it, the tiny changes to the kitchen plan, and intricate discussions about the Kitchen Work Triangle and building chicken coops.

And then, somewhere in the process, I decided I wanted the block next door.

For most people, this is going to sound odd – don’t most of us move out, have our own lives, and endeavour to live as far away from our parents (and in laws) as possible?

But you should see this land.

For the sake of my parents’ privacy I won’t share the address, but it’s stunning. It’s no secret that regional areas hold a huge charm for me, and I was easily taken. While the block doesn’t have the enviable views of my parents’ selection – it’s over the road and down the hill somewhat from their next home – it has a brick bridge for train tracks that runs through it with an infrequent train service (and some freight) over a creek. It’s spacious, and I had basically already chosen where I’d have the house built and where I’d be putting my barbecue before I'd left.

My partner and I have been preparing and slowly saving away for our next property; we have been undecided as to whether it should be an investment or a home in Melbourne given our relocation. This block is just in the range of what we can afford, provided lending doesn’t become an issue in the area, and I called my mother to chat it over.

We have been preparing and slowly saving for our next property; but have been undecided as to whether it should be an investment or a home in Melbourne.

We figured that I could buy it for our retirement, and build on it when prepared to live rurally in the distant future. Quickly, I was calling it “my block” (don’t you love how easily that happens?) and checking out my lender of choice's repayment calculator, doing my own sums. My Dad, a bullish property investor – although we rarely agree on locations or what to buy – told me that if I wanted then I could put solar panels onto it, and have some of it grazed by the farmers to provide some form of an income. Obviously, there are some tax implications to this that I’d need to consider, but it was starting to shape up to something worth considering and that could actually work.

See over page for why I decided to steer clear of purchasing

But then the dawn of realisation occurred.

The day I retire and do my own “tree change” is some decades into the future. I would be laying down no small sum, taking on a large amount of debt, for an asset that doesn’t produce any real rental income. I then wouldn’t be using it for a long time, and the repayments would put a toll on my ability to save and pay down other more immediate debt. With the funds that I’d be using to purchase something that I dearly wanted, and was starting to daydream about, I might actually be stopping myself from achieving more by being wiser with my purchases. Unless you’re one of the lucky few with bottomless bank accounts, then you’re going to need to be careful with your money.

My ability to stomach risk now is likely higher than it will be in 30 or so years. If I choose a property that underperforms, I can weather it through. What is less likely to work, however, is if I tie up all my capital and push myself to full capacity with debt that stops me from investing further in growth assets. Not to mention that my partner doesn’t necessarily want the same things in retirement that I do (that is, to live within walking distance of my family and not within easy driving distance of anything resembling civilisation).

There are also the other considerations – one being that the area will substantially change by the time I come to live there, meaning it might not be the rural haven I'm after when it comes to retiring, or that my own goals and desires to live like this will also alter.

Or I might need to sell up due to a change in my own financial circumstances. This is just one of many regional areas that moves very slowly. Days on market are extensive for the very few properties that come to market each year, not to mention for that particular type of comparatively large landholding. While my investing ‘profile’ suggests that I can handle more risk – this risk of tying up my capital in a very slow moving asset is certainly not the type of risk I am prepared to deal with.

For this reason, my future tree change location is a dream that I’m putting on hold. It’s the pain of the opportunity cost, and risking better more targeted purchases, that I cannot stomach. Not everyone will make this decision – to choose their head over their heart – but it’s the advice that we’re frequently hearing and considering these implications now will hopefully pay off in the future.

It’s amazing how closely linked our heart strings and our purse strings are. Sure, it might ‘feel right’, but I’m getting increasingly used to having to rein in my desire to purchase something – when you write about property every day you inevitably stumble across stunning cheap “renovator’s dreams” and cheapie Tasmanian heritage homes that you’ve already mentally decided to buy, where the dogs would sleep, what colour you’d paint the walls and so on. These “five unusual NSW renovation opportunities” that I put together in May, for instance, had me hooked for a while. Church conversion? I can see myself in that. Old warehouse requiring substantial work and potential sweat/blood/tears? No problem. 

There's nothing wrong with thinking like that, but there may be an issue with acting on it without due care.

If you’re like me, you might get caught up in the dream of property a bit (a lot), but you need to give yourself that ‘step back’ breathing room where you do a bit of a logic test on your decisions. Just because you love it, doesn’t mean that you should buy it. This isn't a pair of shoes, or a fancy meal, this is an often decades-long financial commitment. If you're looking to invest, it's not about your emotions, or even about your instinct a lot of the time. It's about the cold, hard facts and numbers. And, no matter how much you’ve researched it, no matter how close you are to signing on the dotted line, if it’s not right for you – you can look for something else.

There's nothing wrong with thinking like that, but there may be an issue with acting on it without due care.

I’m still learning this lesson, but the fact is that my parents have taken this time, lived in undesirable areas and earned their dream home – both through long careers that they’re still building and through many other years of paying off a mortgage and planning for this. I have a few more stripes yet to earn before I can do the same, so it's back to the drawing board.

Jennifer Duke

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

Canberra House And Land

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