5 common mistakes by first time investors
5 common mistakes by first time investors
Learning from other people’s mistakes (and not repeating your own!) is a really great way to get ahead of the curve, especially in property investment.
If you’re already a property owner, can you think of ways you might do things differently next time?
Here are five mistakes commonly made by first home buyers and first time investors that you’ll want to avoid.
They borrow more than they can afford
There is often a difference between what the banks say you can borrow and how much you can actually afford. Some banks’ and lenders’ internal ‘responsible lending calculations’ aren’t very real world.
They factor in what the basic cost of living is for most people. This amount can be very low and varies between banks and lenders, which means the bank’s or lender’s calculation may indicate that you can borrow more based on your salary than what you can actually afford in the real world.
That being said, when you’re looking to buy your first home try to keep your monthly mortgage repayments at less than 30 per cent of your take-home, after-tax household income — 25 per cent is ideal, if possible.
It may mean you need a higher deposit to keep your repayments lower. This will tell you if you can afford to buy your home now or if you need to wait a bit longer
They don’t clear their consumer debt first.
A deposit is often required to buy a home. That or a parental guarantee. (Though the unicorns out there get a house given to them! Yes, they exist.) Consumer debt cripples many people, particularly millennials.
The thing people may not realise is that for approximately every $10,000 of consumer debt you have, your borrowing power could be reduced by $40,000.
So, do you have personal loans or credit cards to the value of $30,000? That can be around $120,000 of borrowings at risk.
This, coupled with the repayments, impacts your cash flow. You really want your first home to be a blessing, not a curse — so ensure your cash flow is lean and clean before you purchase!
It also means your financial habits are good if you are out of consumer debt (and keeping away from the overspending habit!).
They forget government incentives and don’t have a ‘buy’ strategy
This can be free money. It’s not very often that someone gives every taxpayer (and weirdly some deceased people) $1,000 directly as a stimulus — unless you’re Uncle Kevin 07 (former prime minister Kevin Rudd).
But over time, and particularly in the years following the COVID-19 pandemic, federal and state governments have incentives for first home buyers and investors alike.
This is because the building and construction industry creates so many jobs for an economy.
These incentives could be $10,000 cash grants for buying your first home (new) or a waiver of stamp duty, which could be worth $20,000 or more to you!
Incentives aside, you really do need some type of strategy when buying your first home. To maximise government incentives you should consider what’s available in your location.
While I’m not suggesting you spend more or buy in a location you don’t want to live in long term just to get $10,000, it’s important to have all the data on the table when considering your purchase.
Part of the strategy is also around mortgage structures and future plans for the property.
For example, if you’re buying a house to live in, will it be used as an investment property in the future?
You need to speak to your mortgage broker in concert with your accountant or financial adviser about ensuring you have the most appropriate structure in place.
They don’t have an exit strategy when buying with friends — they don’t have ‘the chat'
It’s so exciting buying your first home. You have a flat mate; discussions happen over a wine; and the next minute you’re buying a home together! What could go wrong?
‘The chat’ isn’t necessarily who is buying dish soap; rather, what is agreed upon if there needs to be an exit from the property.
For example, if one person’s circumstances change and they need to exit the property (e.g. marriage), and the other party can’t buy the exiting person out of the property, is it to be sold or do both people exit and make the property a joint investment property?
Did you set out to be an investor with a friend? You might decide that there needs to be a notice period of at least three months.
The conditions that are agreed to can be whatever you like — just make sure they are agreed on, documented and signed by you both.
It might be a good idea to get a witness. It’s also so important to remember that further borrowing could be difficult without the loan-servicing power from the other person.
They make snap purchases once they are in their home
You have a nice new place that you want to call home. Great. Amazing. Awesome. Just don’t allow this event to cripple your finances by tying up your cash flow with new ‘stuff’.
There’s only one time when you should use interest-free schemes and that time is: never. The reason why this is a mistake is twofold. First, you will always pay too much when you buy interest free.
There is generally no chance to negotiate on the purchase price (yes, it’s interest free, but all parties involved need to make money somehow, right?).
The second reason is because your cash flow is tied up and if there is a change in your circumstances you may not have the money to pay out the loan — and meanwhile the nice lounge you purchased is now worth $500.
Take your time when making your house a home. Live in it for a while and slowly upgrade your stuff. Gumtree and Marketplace are your friends (search in affluent suburbs!).
You may also be able to get some smaller items to make your older lounge look nice (a sheet and cushions or something — but I’m not good at design!).
If you’ve worked hard to get out of consumer debt before buying your new home, don’t fall back into the trap when you’re settled.
Borrowing more than you can afford on the purchase price can also cause financial stress, which ironically might make you feel that you need to take on consumer debt to furnish your house, too.
Edited extract from Sort Your Money Out & Get Invested by Glen James.