19 mistakes it pays for property investors to avoid

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19 mistakes it pays for property investors to avoid

Mistakes are part and parcel of life and I see them as opportunities to learn valuable lessons.

Mistake

However, when it comes to property investing, mistakes can prove to be very costly.

So much so that they can often prevent investors from getting past owning one single property.

I must admit it…in my early days of investing I certainly made more than my fair share of mistakes.

These days, of course, I know better, which is why I wanted to share these common mistakes to help you avoid unnecessary blunders and paying hefty “learning fees” to the market.

1. Buying a dud

This mistake is common amongst novice investors who don’t understand the type of dwelling or the locations that have a history of outperforming the averages. Instead, they buy an inferior property in a second-rate location that will always struggle to grow in value.

 

Fact is: less than 5% of the properties currently on the market are what I’d call “investment grade.”

Of course any property can become an investment – just kick out the old owner and put in a tenant, but that doesn’t make it the type of property that will outperform the averages.

2. Following “free” advice

While advice from our family and friends is always well-meaning, unless they are property investment experts, their opinion should never be adopted as an investment strategy.

Remember, there are around 25 million property experts in Australia and on the whole their free advice can become very costly indeed.

3. Not knowing your borrowing capacity

Mortgage brokers have information about a huge number of loans – far more than any investor could research themselves.

And in the current tighter lending environment, working with a specialised property investment broker, you can save yourself a lot of stress and secure a better deal as well.

4. Near-sighted investing

Forecasting

A frustratingly common mistake for newbie investors is to buy where they know, which is usually the suburb they are living in or where they grew up.

Of course, these locations are not necessarily the best for future capital growth.

You see…knowing the local area is very, very different from understanding the fundamentals of the local property market and what makes a good investment.

5. Ownership oversight

When buying property, it’s important that its ownership structure is working hard for you as well.

Yet many investors don’t go to the trouble of getting strategic ownership structuring advice.

There are many possible ownership structures- in a single name, in joint names, tenants in common, joint tenancy, in company ownership or in a  trust or SMSF.

And there’s not one “best” structure – it depends on your own circumstances and the stage of your investment journey.

Maybe you should consider having the name of the person with the higher income as a greater percentage owner on title so they can receive greater tax benefits.

6. DIY approach

Diverse Business Investment Team

Unfortunately, because everyone has lived in a property, some people think that investing is easy.

Instead of working with experts, they try to do it themselves and often end up with a below-par property that costs them money to hold and takes years to increase in value – if at all.

In my mind professional advice is not an expense – it’s an investment.

If you’re the smartest person in your team you’re in trouble!

7. Not sure what type of debt is best

Some of the well-meaning advice that young people continue to get from their parents or grandparents is about the “importance” of paying off their home loan because it’s not tax deductible debt.

However, that’s not usually the most efficient use of your cash, nor is paying principal and interest back to the bank on your investment property loan.

This will just create a cash flow hole in your finances, plus the principal part of the repayment is not tax deductible.

8. Overspending

A simple mistake for novice investors is paying too much for their property, especially when buying at auction.

By overspending, they will likely create cash flow issues for themselves (paying more stamp duty and extra interest for years) as well as have to wait longer for any decent capital growth.

9. Using a line of credit instead of an offset account

Savvy investors understand that it’s vital to always have emergency funds available if needed, such as for repairs or if a property is vacant for an extended period.

However, rather than using a line of credit and paying additional fees, they store the extra funds in an offset account which they can access when needed.

10. Buying with your heart and not your head

Emotions are what make us humans, but when it comes to investing, they can make us fools!

Investors who get caught up in the heat of a transaction tend to overpay, while experienced investors simply walk away when the numbers no longer add up.

11. Selling too early

On A Yellow Background, Empty Labels Hang On The Rope. In The Center Is A Small Pink Alarm Clock. Tinted Photo With A Place For An Inscription.Property investment is a long-term strategy – and when I say long-term, I mean decades.

Sure sometimes selling a dud property is the right thing to do.

But unfortunately, many investors have to up sell early, particularly when they don’t set up their finances correctly and generally walk away worse off financially than when they started.

12. Misunderstanding all the costs

Everyone knows that property investment is expensive, but newbie investors often don’t factor in the additional buying costs such as stamp duty, vacancy periods, as owners corporation fees, insurance, council rates and maintenance.

13. Not bothering with insurance

While investors insure their properties, many try and skimp on Landlord Insurance, but this is false economy.

Good tenants can become bad tenants due to personal problems and you don’t wnat to be left out of pocket for lost rent or building damage.

14. Analysis paralysis

ThinkThere are about two million property investors in Australia but there are probably about two million others who wanted to get into property but did nothing because of analysis paralysis.

They research the market until they’re blue in the face, then never buy anything because it’s never the “right time” or they can’t find the “perfect” property.

Savvy investors know there will never be a perfect time or a perfect proeprty and realsie they won’t ever know  “everything”, but take action anyway and keep learning along the way.

15. Letting fear rule

One of the reasons why investors do nothing is because they let fear rule their actions.  Some are scared of debt, others of making a mistake.

In my mind the fear of doing nothing and not building an asset base to see them through their golden years should be enough to prompt them into action.

16. Trying to outsmart the market

Property MarketMy strategic approach to investing is too simple for some intelligent people.

I buy high growth properties in investment grade locations, add value and hold them for the long term.

Unfortunately many novice investors chase the quick buck and look for ways to outsmart the market, often being encouraged by property spruikers who promise a fast way to wealth.

It just doesn’t work that way. Wealth is the transfer of money form the impatient to the patient.

17. Buying in one-industry towns

One of the ways that they try to outsmart the market is buying in boom and bust locations – that are generally one horse towns reliant on a single industry – hoping to ride a mythical capital growth bonanza.

The truth of the matter is they generally end up with a property that is worth less than they paid, and they struggle to even secure a tenant if they try to hold on to it.

18. Failing to review your portfolio

Far too many investors adopt a “set and forget” attitude, when they should have a “set and review” mindset.

It’s vital to review your portfolio’s performance at least annually to ascertain its performance as well as identify any properties that would be better off sold so you can invest elsewhere.

19. Not following a proven system

Some investors following a scatter-gun approach, because they’re attracted by media headlines and second-rate data showing locations on the “rise”.

The most successful investors work with experts to adopt a proven system that they stick with like property glue throughout their investment journeys.

 

Originally published on Property Update
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