If there’s one thing about investing in real estate that I know to be true, it’s that no two property strategies are created equal.
This point is reinforced for this week via our newest burning question.
We heard from an investor who had some concerns about a property already in their portfolio – and honestly, they have a good reason for being worried.
Here is the query:
“I bought a three-bedroom property in McDowell in Queensland in mid-2015. It was a DHA property, meaning there is a 10-year rental lease in place, and I paid about 5-8% over the market value. There has been little capital growth in the area since I bought. My feeling is that it was not an informed decision. The yield is okay, but capital growth prospects seem limited.
Well, this may just open up a Pandora’s Box! Because I really don’t like DHA properties and I’m not going to make a secret of it!
Put simply, they are not good value for money, for a number of reasons:
If you buy a DHA property you will immediately pay a premium of up to 10-15% more than other properties in the area. They get away with charging this premium, because they promise you a tenant for a long-term period and they promise to replace the carpets and repaint the property at the end of the tenancy.
But let’s crunch the numbers…
Paying 15% more for a $600,000 property means you’re paying an additional $90,000 – simply for a rental guarantee and some free carpet and paint. I know who gets the better end of the stick in this deal!
When you rent out a DHA property, you receive a return that is slightly lower than the market. Granted, you’ll get no vacancies, which is why many investors are happy to forego a higher rental return.
However, if you’re receiving $520 per week rent on a property that could really achieve $550 per week, you’re missing out on over $1,500 per year – the equivalent of three weeks’ rent. On the open market, you might have no vacancies at all, but with a DHA property you could be paying for the equivalent of 3 weeks’ vacancies. Does that make sense as an investor? Not to me it doesn’t.
The DHA charges a whopping 16% management fee! I don’t know about you, but the highest I’ve ever been charged for property management is 10%. Mostly, I pay between 7-10%.
By charging such an extraordinary fee, they’re really killing your cashflow.
That’s the triple whammy of factors that make me really dislike DHA properties as an investment.
But do you want to know the cherry on top?
The banks don’t like them either! They are considered riskier, so banks often demand higher deposits for this type of investment, if they agree to fund them at all.
This means that if you want to sell, you could be stuck financially as you have limited lenders to work with.
These factors add up to a property that, in the long run, is not going to deliver as much capital growth.
You also have limited resale opportunity, as you can only sell to other investors during the lease period of up to 12 or 15 years…
I’m not sure if it’s obvious yet or not, but my advice is to cut and run! These types of investment do you no favours over the long term and if anything, they will hold you back from making true strides forward financially. You’re far better off doing your own due diligence, so you can find a property that suits your investment strategy and doesn’t clog up your cashflow.
I’m so glad we received this question this week as it really lit a fire in my belly and reminded me just how important it is to get a property education!
And remember, we love getting your Burning Questions each week, so please click here and submit your query today.
