What to do when property bubbles burst: investor $3.5 million in the red

Housing booms have seen many make their fortune, but getting it wrong can leave investors with homes worth millions of dollars less than they paid for them.

In 2012, then 24-year-old Kate Moloney and her 23-year-old husband, Matt, were crowned Investors of the Year in Your Investment Property magazine. Today, if the Moloneys sold all their properties, they would still owe $3.5 million to the banks.

“We started this journey when we were 21, we had half our home paid off. We were told to go and refinance our home and get finance to buy an investment property,” Ms Moloney said.

They bought 16 properties in mining towns such as Queensland’s Moranbah, pocketing $570,000 a year in rental income. Now, they are considering all their options, including bankruptcy.

“There are many people here who have been affected [by the property downturn]. Suicide and depression is rampant, people are on anti-depressant tablets … you’re never shown this side of the story,” Ms Moloney said.

Yet they are the lucky ones, she said, who have gained a new perspective on life and a stronger marriage as a result of the ordeal.

In mid-2011, Moranbah’s median price was $750,000, Domain Group data shows. In 2015, this plummeted to $180,000 as the mining boom came to an abrupt halt.

It’s not the only town or suburb suffering from a rush of speculative investors who inflated the markets, Domain Group senior economist Andrew Wilson said.

“The whole Central Queensland region is affected and had clearly been in a bubble – it hasn’t bottomed out yet,” Dr Wilson said.

Losing money when property investing is the second most common money mistake, a finder.com.au survey of 1043 Australians shows. Respondents indicated an average loss of $106,104 through property investment failures.

Alps Network financial planner Andrew Courtney said people could claim bankruptcy after first exploring all their options and seeking advice.

“Bankruptcy generally lasts for three years and will be on record for at least five years under credit reporting agencies,” Mr Courtney said. 

“Part of risk management is to start with the end in mind and to have multiple exit strategies for each individual investment you make,” he said.

Tempering loan-to-value levels, by paying off the mortgages more quickly or purchasing with bigger deposits, is a “sound strategy” property investors should consider.

Avoiding the worst risks strongly relates to an investor’s choice of property market, Mortgage Choice chief executive John Flavell said.

Depending on the situation, it might not always be worth selling early and cutting your losses.

“While it is tempting to sell a property when prices start to fall as you don’t know when they will pick back up again, sometimes selling can just make the problem worse,” he said.

“The key is for investors to sit still, take stock of the market and make an educated decision as to the future of the property market in their local area,” he said.

For those who do need to sell, he recommends putting as much money into the loan as possible to reduce the outstanding balance and move them away from negative equity.

Keshab Chartered Accountants’ Jeremy Iannuzzelli said investors should remember to diversify their properties as owning all your properties in mining towns is a “lot of eggs in one basket”.

“Don’t buy on the back of hot spot hype around mining booms,” Mr Iannuzzelli said.

“Buy somewhere that has been there for years, where there’s not a lot of land that can be built in and you’re close to amenities,” he said.

How to avoid high-risk investing

Avoid property spruikers 

Talk to experienced investors people who won’t financially benefit from the transaction.

Crawl before you walk

Pace yourself and ensure you’ve done all your research before diving in.

Consider how you’d manage in a downturn

Have a buffer in place and ensure you can afford to hold through the bad times.

Invest for the long-term

If you want a quick dollar you’ll be able to lose it just as quickly. Look for long-term investments with slow but steady returns.

Diversify your investments

Different housing markets perform at different times. Holding homes in different locations means you won’t be holding a portfolio of properties all struggling at once.

Source: Jeremy Iannuzzelli

Kate Moloney has written a book, Bright Yellow Happiness: Finding Fulfilment From Financial Ruin, about her investment experiences.