5 Common Mistakes In Property Investing
Property investing has long been a main stake of investment strategy in Australia – for both novices and experts alike.Yet, as rewarding and effective as property can be as an investment, there are some pitfalls that are unfortunately all too common. These can render investments potentially ineffective, if not costly. Here are a few key areas to seriously consider before shopping for a property, making offers or signing on the dotted line.
Poor financial structures
With property being a major purchase and one that attracts considerable costs in addition to the purchase price, such as stamp duty and legal fees, it is important to consider the ‘how’ of buying just as much as the ‘what’.
Other than buying the investment in your own name, you might want to set up a family trust or use your superannuation fund, turned into Self Managed Super Fund (SMSF), to undertake the purchase. Changing the ownership of the property later is going to be a costly exercise, so it is worth considering the options before you go shopping for the right property.
Likewise, with the plethora of loans and mortgage products out there, it is good to consider the options before you pursue the right property. Getting the right advice from suitable professionals with experience in structuring investment portfolios is highly recommended.
Lack of solid research and due diligence
Researching the market, looking at competitive pricing, rentability, vacancy rates, and proximity to employment centres, education, transport and shopping all make part of thorough due diligence for suitable investment locations.
This should happen well before even thinking about the property itself - yet, this is often overlooked. In addition, undertaking research into infrastructure, both current and future, should be a priority as these can have a major bearing on the performance of your investment over time.
Access to industry data and research that tells you comparable property prices is not that hard to come by these days - you just need to know where to look. Talking to real estate agents, getting local knowledge, as well as sourcing reliable hard data and combining this will give you a solid understanding of your target location.
Using emotions to make decisions
The most important thing to remember is that you are not buying a home – you are buying an investment. All to often people make investment decisions based on emotion. Much like when buying a home, which sometimes can mean people take unnecessary risks, with some failing to look at the figures that should be the basis of any investment decision.
While it is understandable that you might want to buy an investment that you ‘like', it is paramount that the returns stack up and the property is ticking all the right boxes on the ledger and the due diligence checklist.
Over-borrowing without a safety buffer
Property finance is cheap right now (low-interest rates) and the time to get into the market is now. However, always allow yourself a buffer in case there is a shortfall in rent; the property requires unexpected repairs or maintenance, or the interest rate goes up.
All these factors can easily occur and you should never leave yourself up against the wall, where these circumstances can put you quickly under stress, potentially even jeopardising your investment.
A rule of thumb is to allow for at least 3 months of costs as a buffer. Of course, it is highly recommended to have all relevant insurances in place to minimise risk and protect your investment and your capital.
Lack of strategic planning
What is it that you want to achieve? If you don’t know where you are going, any road will lead you there, goes the saying.
Having a game plan means having direction. Knowing how you need to finance it, how this property will fit into your investment portfolio and work towards building wealth. This means being aware of the desired outcomes, both short and long-term - be it to reduce your tax bill (negative gearing), add extra income or buying with a view of renovating/redeveloping it later.
It is always recommended to seek advice from suitably qualified experts who are versed in property, and are not bias or have a motive to sell you their product, property or service.
As commendable as it is to obtain an investment property, given that risks and mistakes can easily turn rather costly, it is always wise to seek advice from people that are experienced. Seek out qualified experts who hold their own successful property portfolios.
Ideally, you should obtain a number of opinions and then decide based on the most reliable advice. After all, it is easier to learn from those that have travelled there, than from those that have not. Happy investing.