The 3 biggest mistakes property investors make when starting out
What are the three biggest mistakes, first time investors often make that restrict the growth of their portfolio, and how you can avoid them?
Many investors have started out with the intention of building a portfolio and creating wealth through property, but only a handful of investors end up making it past their first investment and are able to build their portfolio to build real wealth.
Below are in my opinion, the three biggest mistakes made that inhibit first-time investors from growing their portfolio:
Not getting professional advice and representation
You should always seek professional advice. It is crucial to have the right finance structure in place. A good mortgage broker will be able to advise you on the best finance structure and lender that suits your individual circumstances. Going to a bank directly will not necessarily set you up with the best deal and could cost you thousands in additional interest. A bank may also advise you to cross collateralise your loans which will inhibit portfolio growth in the future. You should however always tread with caution and ensure you are dealing with an experienced broker who has a lot of experience in obtaining the type of loan you require for the purchase.
Always have your contract reviewed by a solicitor, as they will be able to bring to your attention any unusual terms or special conditions in the contract. A solicitor can also add clauses into the contract to protect you against things you such as finance clauses, or request extended settlements.
Seeking the assistance of a buyers agent to handle the whole process including the negotiations and auction attendance could also save you thousands of dollars but will also protect you against any smart sales tactics of the real estate sales agent. Buyers agents work to protect the buyer and are unemotional in the purchase so are prepared to walk away if the property is deemed unsuitable.
One of Aus Property Professional’s clients shared their story about how they had previously purchased their first investment property because it was close to home, and their wife was good friends with the neighbour. They liked the newly painted exterior and were happy to start out with a small two bedroom townhouse. The sales agent convinced them they would have no trouble finding tenants for the property.
Due to their emotions, they paid too much for the property and the value after two years is less than what they paid. Further, the area is very family orientated and two bedroom properties are not in demand for that demographic. They had difficulty renting it out, and regret not seeking professional advice and letting their emotions dictate their investment.
Underestimating the cost of purchasing.
When purchasing your first property, it is always wise to put aside additional funds. Apart from the deposit for the property, you will need enough money to cover stamp duty costs, legal costs (solicitor), other finance costs (such as lenders mortgage insurance), insurance, building and pest inspection and small incidentals (such as maintenance and repairs to prepare the property for tenants). These additional funds can also give you some support if you do not have tenants immediately entering the property upon settlement and you have a few weeks vacancy in the property.
I have seen scenarios where people have purchased a property below their budget but only considered the 20% deposit as all the funds needed. They struggled to find the additional monies to cover stamp duty and legal costs. It is very important to get the right advice and know exactly how much funds are required for a purchase, prior to signing any contracts.
Trying to time the market.
One of the biggest struggles we see with first time investors is they try to time the market and are willing to wait for a better deal. This is fraught with risk of missing out entirely and will only result in analysis paralysis.
While it is very important to get a grip and understanding of the market you are buying in, it is more important to ensure you pay the right price for the right property rather than trying to time the market. It is virtually impossible to predict precise housing price trends in the future. No one knows where the bottom (or top) of the market cycle is until it is an afterthought - even the experts struggle to get a grip on this. In today’s markets, you have a lot less competition than you did a year ago which provides buyers with more negotiation power.
This struggle always leads to investors not moving forward, which will get you nowhere. Always keep your eye on the long-term. Purchasing the right property at the right price will reap you the rewards in the long term.