Top 11 Mistakes Property investors Make (and how to avoid them)

A collection of icons of buildings. Vector illustrationWhy is it some people seem to be able to turn every property investment they touch into gold while for others it ends up in tears? The reason is all about knowing the secrets to property investing. Property investment is more than finding the best bargain and then just letting the property look after itself.  Let’s face it, if it was that easy we’d all be wealthy.  Over the years we seen it all and following is a list of what we consider are the top eleven mistakes that property investors make.

1)    Jumping in without any thought or plan

 You have been trying to decide if an investment property is for you.  Finally you decide to go for it so you spend the weekend surfing the web looking at different properties for sale.  You find one, you ring the agent and you put down a deposit.  If this is how you work you are heading for trouble.

Investing in property should be like a business and like any business, a plan is essential.  Sit down with an experienced person and make a plan that covers the following questions:

–        How much are you willing and able to invest

–        Where will the deposit funds come from.

–        What additional costs both at settlement and annually will arise.

–        What is the rental return and how much will I be required to pay on a monthly basis to support the investment

–        What capital growth can I expect the property to return over a 5 – 10 year period

–        What type of property should I look for – high growth, lower yield; lower growth, higher yield; renovation potential; sub division potential; local, interstate and on it goes.

–        Determining the best structure to purchase the property for taxation, asset protection and funding purposes.

2)    Not giving property investment the respect it deserves

Property investing should be treated like a business if you want to achieve true success.  Yes, it will take some of your time but this time will be wisely invested.

You can achieve this by ensuring you surround yourself with people who can advise you on the following:

–        Property

–        Finance structuring

–        Ownership structures

–        Taxation

–        Legal

–        Zoning

Not structuring your finance correctly can potentially cost you many thousands in lost tax deductions and in the same moment turn a viable investment into a lemon.

3)    Buying a property you have fallen in love with

 Even when buying your residential property experts say not to fall in love with the property as this weakens your ability to negotiate.  With an investment property this saying is even more pertinent.  You are buying a property that will provide financial benefits for you.  The property you select may not be one you would want to live in but that is not the point.  You want the best property to provide positive returns for the minimal outlay.

4)    Not researching investment areas

 You’ve always wanted a property by the beach so you decide this is going to be where you will buy. Sounds great in theory but is a coastal property going to offer the best return in the end?  It’s important to do the research and ensure your proposed investment meets all the criteria in your plan. (You have got a plan haven’t you?)

You can do some research yourself on what areas offer the best returns (and be prepared for this to be in an area that may not be your first choice).  That beach property may not be the best option just at present, however, for the second or third property it could be perfect.

5)    Purchasing from a seminar and purchasing sight unseen.

Wohnung - Haus mit GartenYou receive the phone call.  The friendly person on the end of the phone is so excited about an upcoming seminar. This seminar will explain how you can use your tax to purchase an investment property and secure your retirement future so you agree to head along.  Suddenly you’ve signed a contract to purchase a house in an interstate suburb and before you know it you’re the owner of a new house in the next ghetto suburb.

Eventually you realise your mistake, call up an agent to sell, only to realise that another 20 people have had the same epiphany.  What do you do?  Sell and crystallize a major loss or hang on in the hope that the market will grow at double digit rates and you maybe can sell out and get your money back.  Not a nice situation and it’s occurring on a daily basis.

Having said that, not all property seminars are selling dreadful properties.  The onus is always on you to do the research.  The bank won’t look out for you; they’ll lend you the money even if the valuation comes in way under the purchase price, as long as you’ve got plenty of equity in your residential property it’s yours and they won’t even tell you about the shortfall!

Property is expensive to purchase and sell, unlike shares.  Most wealth is created by buying, holding and building a solid portfolio that will provide both a long term residual income as well as long term capital growth.

Always remember…Caveat Emptor: Let the buyer beware!

6)    Buying a property in the latest hot spot

If you are trying to buy a property in the latest hot spot (e.g many mining towns) then you may be paying a premium price at the top of a market.  Investing in hot spots can be profitable, however, it requires serious research to ensure that you’re not purchasing near the peak of the market and that the area that you’re investing in has long term potential.  Some mining towns are better than others due to a myriad of reasons.

If you want to make good money out of hot spots you need to buy before they become popular or they reach their peak.

The successful investors talk to experts and read extensively to find out which areas will offer the best long term growth potential over the next 5 to 10 years.

There are definite opportunities in searching for “Hot Spots”, but there is often a much greater level of risk,

7)    Buying the wrong type of property for the area

 So, you only want to buy a house as you want to avoid the hassle of body corp fees etc.  This is understandable, but it may be that in the area you have selected growth is coming from units and not from houses.  So, yet again, research is essential.

In addition, you may find that investing in a unit will give you more scope as their purchase price, in general, is often lower. So, before deciding on the type of property you “just have to invest in” find the best area to invest in and then find out what type of property provides the highest returns.

8)    Believing the lowest interest rate mortgage is the best

 So, you have chosen an area to invest in and know what price range you can afford so now it is time to get the finance in place.  You do some research and see this fabulous deal for an extra low introductory rate with X lender and decide to go with it.  Well stop right there, as the chances are that this low rate mortgage will cost you substantially more in the long run.  Mortgages are like cars..you get what you pay for!

Finance for an investment property needs to be structured in a specific way to ensure you get the most benefit from your investment.  The best way to do this is to speak directly to us, we’ll guarantee that your facility is structured correctly to maximise tax, reduce your non- deductible debt and protect your assets.   Finance that is set up correctly will save you thousands.

9)    Becoming your own property manager

 If you only want one investment property and it’s located close by then handling it yourself may work.  As long as you know all of the rights and rules for tenants and know how to find and select suitable tenants then you should be okay.

However, if your goal is to keep building your property investment portfolio then you most likely find that your time (and the money it will cost) better spent leaving the tenanting of the property to an expert.

10)  You try to save as much as you can before even considering  investing in property

 Some people fear debt – in fact it sends them into cold sweats.  However, not all debt is the same.  Debt will help you create wealth if it’s used responsibly and for the correct purpose.  Debt used to invest in property is good debt and if it also entitles you to tax deductions even better.

With the correct finance structure the debt associated with the investment property can be fully tax deductible to you.  The income that you receive can be directed to accelerating the reduction of your non deductible residential debt allowing you to become effectively mortgage free sooner than doing nothing at all.

Arrows aiming for the skyIf you have a decent amount of equity in your current residential property, then you are perhaps in the position to start building your property portfolio far quicker than if you wait to save a deposit.  The funds you’re thinking about using for a deposit should be directed towards your non deductible residential debt, not used as a deposit for an investment property.

The sooner you start building your portfolio, the more time you have to benefit from Capital growth.

11) They fail to manage risk

Whether it be running a business or growing a property portfolio, managing risk is often a last consideration and usually only arises when it’s too late and the risk event has occurred, resulting in substantial unrecoverable losses.  When it comes to building a property portfolio, the following are risk areas that need to be considered:

–        Interest rate management

–        Landlord protection insurance

–        Income protection insurance for the borrowers

–        Buy/sell agreements if you own a property with a partner

–        Adequate replacement insurance on the property

–        Life and Trauma insurance for  the borrowers

–        Public Liability insurance

–        Correct ownership structure for Asset protection

Most of this doesn’t cost a great deal and most investors will have most of the above.  One of the main problems arises in being underinsured.  A policy that you took out 5 years ago may no longer be totally adequate for your current needs.  Annual reviews of all policies should always be undertaken.

Please contact us if you would like to discuss any of these points further and/or if you would like to consider investing in property.

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