what is opportunity cost and why does it matter?

We look at the concept of opportunity cost and how by buying the wrong type of real estate in the wrong market can not only cost you an absolute fortune, but it can cost you a whole heap of time as well.

Back in 2011, I worked for another property business and my mentor at the time said, “Drew, buy the best piece of real estate that your money can afford, and you simply cannot go wrong”.

So that’s exactly what I did.

In April of 2013, I purchased a two bedroom unit off the plan in South Brisbane. I paid $525,000 for that property, and in November of 2014, the property settled.

So let’s go through the numbers.

10% Deposit: $52,500
Stamp duty: $16,800
Legal fees: $2,300
LMI: $10,048.

TOTAL: $81,648

Now fast forward to where we are today.

In July of 2019, I spoke to an agent just the other day and he said, “Drew, you would be lucky to get your money back if you sold that property today”.

Now you can imagine my frustration. Lucky to get my money back? I invested $81,648 six years ago. Very frustrating indeed.

Now my mentor may be correct. It’s in a beautiful building, it’s in a very good location and in the long term, I have no doubt that it’s going to do very well. Which is okay if that is your investment approach.

That is the typical retail investment approach. Buy, hope and pray.

Now as you know, my strategy doesn’t incorporate that at all.

So let’s go through an example which we helped our clients invest in, 18 months ago.

They purchased a duplex for $701 800. For an eight bedroom, four bathroom, double lock-up garage home, which had the ability to be Torrens Title subdivided.

10% deposit: $70,180
Legal fees: $2,300.
Stamp duty: $348 (including a New South Wales government grant of $5,000)

TOTAL: $72,828

Now this is the great thing. Each individual duplex half, being the four bedroom, two bathroom, one car, has been appraised at $425,000 to $450,000 per side. So if you look at a gross realization, that’s $850,000 to $900,000 on a $701,000 purchase price.

So in this particular deal, in 18 months, clients have been able to generate $148,200 to $198,200 in less than 18 months.

So, the moral of the story here is opportunity cost is real.

Property can be very unforgiving if you get it wrong. So make sure you invest with the right strategy in mind before you actually pull the trigger on something.

Remember, look at how you’re making your money going into the deal.

Buy under market value, add value, to give you the option to sell or refinance and keep growing your money forward.

Any questions give us a call 1300 881 422.