Negative Investment can be quite a problem…..but what is it.
Well it’s when the house is worth less than you paid for it. This can be a real issue if you need to sell the house.
There are three ways you can find yourself in a Negative Investment Situation:
Falling House Prices
For a long time a lot of people though that house prices always go up.
Over the past five years prices have been more up and down. Now they seem to be on the way up at the moment but there is no guarantee that will continue.
Unfortunately there is nothing any of us can really do about this problem in the short term. If you can wait long enough you should get your money back. In 1991 we built a house in Country Victoria for $130,000. Ten years later we couldn’t sell it for the original cost. After renting it out for another 5 years we were able to sell it for $200,000.
At least with this type of negative investment it will also typically affect the price of any house you buy when you sell your existing house. That’s good if you do keep in the housing market……….but not good if you have to sell and enter the rental market.
I have already mentioned that the builder provides the Typical Display Home with upgrades that increase the cost of the base house by 50%.
If you go for a similar level of upgrades you may not get your money back. This is because:
- When you put the house on the market you will be competing with houses in the same suburb that didn’t cost as much. Those owners are happy to sell for less than you. This means you may only get minimal interest from buyers.
- Taste is very individual. For instance prospective buyers may not be too keen on the ‘Special’ tiles you paid thousands extra for.
If you keep the house for a long time,say 20 years, this effect of the upgrades diminishes as your original costs wil be long forgotten and buyers will be expecting to remodel.
Over Development is the extreme version of upgrades. Its when you put the biggest possible house on your block….. Often loaded with upgrades.
With this you may now have a house that costs two or more times that of the average house in the suburb.
When you come to sell the problems are:
- For the price you want most people will prefer a smaller house in a more expensive suburb.
- Generally people want outdoor space in proportion to the size of the house. A narrow gloomy strip at the sides and back won’t cut it.
The trouble with Over Development is it can have a permanent effect on the value of the property.