CBA have released an innovative property investment simulation that allows you to invest virtual money in property and watch the results over a 15 year period. This is designed to help investors put their toe in the water and learn about investing, without risking their real money.
We had a go playing around with the simulation, and overall we believe it is a great tool to help rookie investors to learn the basics.
We chose the “solo high flyer” profile and over our ten turns we decided to follow a high risk / maximum return strategy. This involved us borrowing to the limit (well we do work in finance!) and keeping very little money on standby.
In the real world this strategy tends to result in people facing financial hardship and being forced to sell an investment property if there is an unexpected expense or if interest rates rise. The simulation quickly left us unable to make our repayments and sold one of our properties as a result. Later on we sold a further two properties that were not performing well to enable us to invest elsewhere.
In the 10 turns that we had to build equity we turned our $71,000 starting net worth into a net worth of $5.3 million which works out to be a 15% per annum return. We purchased 24 properties and sold 3 in total. This was a great result, however in the real world such high risk strategies are rarely advisable.
However we did see some small let downs in the simulation. Rent doesn’t appear to increase after renovating a property. Sometimes the search budget was very low even though we had sufficient cash to almost buy the properties outright. There are no offset accounts so the simulation will teach investors not to have cash on standby, in the simulation it is just dead money.
We also believe that people who use this simulation will have a very rosy view of investing in property. The tenants didn’t leave no matter how much we put the rent up, property never went down in value except as a result of one off events in particular suburbs and as long as you offered 10% below the asking price your offer was always accepted and you had an instant capital gain!
In real life the majority of people do well by buying in high growth areas, which will rarely have properties sell below market value. It would be nice for CBA to do a little extra work and make the simulation more realistic. Investing in property isn’t to be taken lightly and people need to be aware that it isn’t a risk free investment.
Interestingly, our staff tended to match their real life investment behaviour in the simulation. We saw some of our staff invest conservatively, others were far less risk adverse, one purchased all of their properties in one suburb and another kept a large amount of cash available. This simulation gives people a chance to test managing their investments in a different way and to then see how things pan out.
Overall we believe this is an excellent simulation and a good introduction to investing for beginners. Property does get water damage, interest rates fluctuate and you can try to charge your tenants over the market rent. Although it would be nice to see some changes such as to have a dashboard on the side showing cash available, your borrowing capacity, current cashflow etc and it would be nice if it was more realistic, we highly recommend that new investors give this a go.