7 Traps New Investors Need To Avoid
Every year, thousands of new investors enter the property market, which is great, but many get caught out by a few traps that are easy to avoid if you know about them.
Before you set yourself free in the property world, there are a few traps that often catch new investors.
I am not afraid to tell you that I have fallen for many of these traps over the years and it is never a good feeling. Once you have developed your investment strategy it is vitally important that you maintain the mental discipline to stick with it. In my experience, it is only ever been when I have steered away from my plan that I have fallen victim to one of these traps.
It seems like when it comes to investing in property there is an expert on every corner offering you the deal of the century. Although many of these deals are good, honest deals offered by reputable companies, you need to know whether they’re right for you or not.
Most of these experts are just salespeople who are chasing a commission by convincing you they have the best deal for you. You need to be aware of this and not get caught up in their hype and stick to your plan.
Here are the seven most common traps that new Property Investors fall for…
1. Buying on emotion
Even though some of us deny it, our decisions are influenced and controlled by our emotions. How many times have you seen someone throw away all logic and buy a family home on a complete whim with no regards for their initial budget?
We have all seen it before and most of us can put our hands up and say we have done it at least once in our life (maybe not with a house, but do you know how many new gadgets I have bought purely on emotion?)
Sales people are very good at getting us to throw away the logic and make our decisions based on emotion. They spend time each and every week training and developing new skills to make it easier for them to part you from your cash.
This is not a negative; it is just something you need to be aware of because purchasing an investment property requires a very different checklist and criteria compared to most other decisions. To become a successful property investor, you need to distance yourself from the property, which will remove much of the emotion and allow your logical mind to rule.
One simple strategy to avoid getting caught in an emotional decision-making trap is to create your checklist that every property has to meet before you will consider buying it. This is one thing that I have always done and has saved me from making mistakes that could have cost me millions of dollars.
You see, purchasing an investment property is a business venture and decisions should be based on thorough due diligence and strong returns. It matters little if the fixtures, fittings, and décor of the house match your personal taste because you are not going to be living there. However, everything does need to be in good working order and functional because it’ll be your responsibility to maintain them over the coming years.
2. Purchasing the wrong type of property
Creating a profitable investment portfolio involves purchasing multiple properties gradually over time. It is important that you know which type of properties will suit your goals as purchasing the wrong type of property can slow down your growth and may prevent you from reaching long-term goals.
There are strengths and weaknesses with units, townhouses, and commercial and residential homes. In the right strategy and at the right time all of these can be a profitable and sustainable property, however in many when purchased blindly their limitations can be crippling to your overall strategy.
For example, buying a commercial property can offer you a good rental return, but can sit vacant for many months or years between tenants. What impact would this have on your overall investment strategy if one of your properties were vacant for this long? It would definitely limit the growth for most of us, wouldn’t it?
My advice to property investors is to first invest the time to create your strategy based on a proven model. In the beginning, stick with solid residential homes or townhouses (bread and butter stuff).
Ideally, any property you end up purchasing should have owner-occupier appeal, so its family friendly and in high demand to rent out.
3. Purchasing in the wrong location
The first rule of real estate is “Location, Location, Location,” and remains the catch cry of every successful property investor.
It is just as important to look at where you are going to buy, as this will affect your long-term success as a property investor. Just because a property is cheap doesn’t mean that it is going to serve you long term.
One of the most common mistakes people make when selecting an investment property is to purchase it purely because it is close to where they live. This goes back to buying based on emotion and just because you fell in love with your area when you bought in there doesn’t necessarily make it a wise investment choice.
There are several factors that I research before I decide upon any location to invest in. They are…
1. Access to public transport - I prefer buying in locations that are near a train station.
2. Low rental vacancy rates - You never want your property vacant for too long, it has too much impact on your lifestyle.
3. Low unemployment - Increases your chances of finding a good tenant who pays their rent on time.
4. Capital growth of surrounding suburbs - If a suburb has had strong recent capital growth it is a fair assumption that the surrounding suburbs will grow in the near future.
5. Recent council approvals for new infrastructure - New infrastructure like shopping centres, transport links, and developments always creates interest in a suburb.
6. Diverse local industry - I avoid suburbs that rely too heavily on one or two major employers or industries (like tourism) because their growth and returns are based on the success of the industry.
7. Easy commute to major centre - A suburb has to be an easy commute to a major capital city or employment hub so it is appealing to a broad number of tenants.
8. Number of owner-occupier properties compared to rentals - When it comes to selling your property if it is in a location that is as appealing to owner-occupiers, as it is investors.
9. A range of available properties - Understanding the mix of different property types in an area gives you the power to purchase a property that is always in demand. There is no point purchasing a small unit if most properties in the area are four bedroom houses, it limits your potential market.
4. Not knowing the numbers upfront
Any property investment is a business decision and as such needs a business understanding of the numbers involved. You need to invest the time to properly educate yourself on the local market conditions, what prices properties are selling for and what they’re renting out at before you purchase. There is a host of free or low-cost resources available online that gives you recent sales data, median house prices, and growth trends.
When you fail to understand and properly research the numbers, your chances of paying too much, making a bad purchase decision or buying a property at the wrong end of the market increase greatly.
Not only will this affect your lifestyle in the short term, having to cover the shortfall in mortgage payments but will also affect how many properties you can purchase because you will have to wait much longer before you can utilise any equity in the property.
You always need to purchase properties with a calculator, not your gut instincts. Know what the rental yields are going to be, the tax incentives, the loan payments and all the other out-of-pocket expenses to determine whether the property fits within your investment strategy.
5. Purchasing with the wrong structure
Creating the right structure to purchase your properties under can help minimise the amount of tax you pay, maximise your potential for growth and protect your assets against any losses.
When you establish the right structure, you will be able to grow your investment portfolio much faster and eliminate many of the risks. This is an essential step and has to be done before you start building your portfolio if you want to maximise your returns.
Setting up the right strategy can convert your tax dollars into positive property, so it’s worthwhile seeking out how this is possible and learning the strategies to implement this.
Most people begin to look at this once they’ve already started creating their portfolio, but by then it is too late as they are losing $200-$300 a week in holding costs. Do your own research and seek out specific advice as to what structure’s going to work best for you before you purchase a property. It will save you thousands of dollars and untold hours of stress and worry.
6. Getting the wrong loan
It is important that you know that many mortgage brokers are salespeople who rely upon the commissions paid for your loans. As such, they can often be influenced by what is offering the highest commission or easiest approval and not what is necessarily best for you. You will also find that many mortgage brokers are only experienced in writing loans for owner-occupiers and not investors, so they may lack the specific skills you need to create the best loan for your circumstance.
There are certain loan structures that lend themselves better to certain strategies than others, however as we have already discussed many mortgage brokers aren’t properly skilled in these areas.
I hear many people say at this stage that they just want any loan to get started and will look at structuring them properly in a couple of years. Not only can the cost of re-structuring your loan portfolio be very expensive, it can also severely limit the speed of growing your property portfolio.
The best tip I can offer is to get involved in the finance process, try and understand what loan you are getting, how it works and what conditions you are agreeing to. This way you will have peace of mind knowing you have the right loan product for you.
It is imperative that you do your research ahead of time and seek out the services of an investment specialist mortgage broker, who’ll help you set up the right loan within your newly created structure to maximise your long term profits.
7. Not taking action
Ok, we are finally at my favourite trap for new investors and that is not taking action. So many people invest all the time into researching property, developing their strategy, looking at the right areas and never taking any action. People get sucked into the outer game and start making excuses and trying to justify to themselves why they cannot or won’t start investing in property.
Without fail, these people let their fear and old beliefs control them. People that do not take action use this uncertainty to justify excuses like “It is not good timing” or “I can’t afford it yet” and the hundreds of other excuses we all hear.
If you are starting to say to yourself any excuse that is talking you out of taking action and starting your property-investing journey, I would like you to know that it is ok. It is always scary when you are getting started and you might stumble from time to time.
But what I would like you to do is look back at what prices average houses sold for just ten years ago. Then look back at what they were selling for twenty years ago. I can guarantee you that no matter what area of Australia you live in if you’d started investing in property twenty years ago your portfolio would have grown substantially. If you’d started ten years ago you would have doubled your investment already.
No one has ever got ahead by sitting on the fence waiting for the right moment to get started, but everyone who bought a property ten years ago would have doubled in value if they still had it.
I do not mean to be harsh, I just want to inspire and motivate you to get started on your journey to freedom and wealth. The first few steps are the hardest but it does get easier, I promise.