Five costly mistakes first time property investors need to avoid
First time and inexperienced property investors stand to lose thousands of dollars if they fail to avoid the five most common real estate investment mistakes.
First-time property investors should be aware that there are several common mistakes that can be detrimental to their investment success.
A lack of experience in a complex investment field can cost thousands, even tens of thousands of dollars, if avoidable misjudgements and mistakes are made.
As English philosopher Sir Francis Bacon wrote in 1597, knowledge is power, and nothing has changed in the ensuing 426 years to challenge that notion, especially within the property sector.
So, here are five pitfalls every inexperienced, or even seasoned, investor should be aware of and avoid.
1. Not doing research
Research plays a crucial role in property investing, as it helps investors make informed decisions and maximise their chances of success.
Research allows investors to identify potential investment opportunities in the property market.
By analysing market trends, property values, rental rates, and growth projections, investors can identify areas or properties that have the potential for high returns.
They can also evaluate various types of properties, such as residential, commercial, or industrial to determine which aligns with their investment goals.
Research also helps investors assess the risks associated with the various residential property types common in Australia.
2. Poor planning
Not having a plan when investing in property can have several negative repercussions.
Without a plan, investors may make impulsive or uninformed decisions. They may be influenced by emotions or external factors, leading to poor investment choices.
Making decisions without a clear strategy or goals can result in purchasing properties that do not align with their financial objectives or risk tolerance.
3. Overextending financially
It is crucial for first-time property investors to exercise caution and avoid overextending themselves financially.
Proper financial planning and accurate cost calculation are essential for a successful and sustainable investment strategy. Key tips include setting a realistic budget, calculating the return on investment (ROI), factoring in unexpected expenses, researching financing options and avoiding overleveraging.
4. Going it alone
While it’s possible to invest in property without help, it’s advisable to seek the advice of experts. Consult with real estate professionals, financial advisers and accountants to gain valuable insights and guidance.
Their expertise can help you make informed decisions, avoid costly mistakes, and properly evaluate the financial aspects of your investment, including tax implications and other unforeseen costs and areas of potential saving.
5. Failing to claim depreciation
Failing to claim depreciation and other tax deductions can result in missed opportunities to reduce your taxable income and potentially pay more in taxes than necessary.
Investment properties generate thousands in tax deductions for their owners each year. The following table outlines the tax deductions available to property investors.
Depreciation is the only non-cash deduction available to property investors, which means that money doesn’t need to be spent in order to claim it.
Depreciation is the natural wear and tear of a building and the assets within it over time. The Australian Taxation Office allows owners of income-producing properties to claim this as a tax deduction. Claiming depreciation allows investors to reduce their taxable income and improve cash flow.
There are two types of deductions. Capital works deductions (Division 43) are deductions that can be claimed for the wear and tear that occurs toa building’s structure and the assets that are permanently fixed to the property. Plant and equipment depreciation (Division 40) can be claimed on the assets which are easily removable from the property or are mechanical in nature.
As a first-time property investor, it’s essential to do your research, budget for expenses, have a plan, seek the advice of experts and take advantage of all tax deductions. By avoiding these common mistakes, you can increase your chances of a successful property investment.