Some say failure is the best source of learning you could ask for. Lucky for you, there's already a sea of common mistakes to avoid when investing in property that you can learn from to avoid property bloopers yourself.
We always talk about what you need to know when investing in property and what you should do, but what you should NOT do is arguably just as important.
Avoiding common mistakes when investing in rental properties can mean the difference between success and a dud investment property. Without due diligence, your financial stability and your capital growth could be on the line.
We've outlined 11 common mistakes to avoid when investing in property to help you stay on the right path.
1. Investing with your heart, rather than your head
We like to think that we're rational, but matter of fact is that emotions play a huge part in our decision when we buy our home. For your investment property, that's what you need to avoid at all costs.
Being a successful investor means putting emotion in the back seat and treating your property like a business.
Picture this: You're at an open home inspection, you love the look of the place and it seems like it's in just the right neighbourhood. The broker tells you that they've had several offers and that you need to jump on today if you want a shot at landing the property. The FOMO creeps in and you're getting conflicting emotions. Do. Not. Buy!
In the scenario above you should always sleep on it, and do more analysis about the capital growth and the rental yield of the property.
Apart from just buying and selling properties, treating your property like a business includes:
- Not renting your property to family & friends
- Raise the rent when you know you should
- Bring a property manager on board to help make objective decisions
- Don't fall in love with your property
Objectivity is the name of the game, and being analytical is the game plan if you’re going to be avoiding common mistakes of the real estate world.
2. Skimping on the research
In the world of rental properties you can't blame your dog for eating your homework! If you skimp on your research, you're only fooling yourself.
We get that extensive research can feel a bit tedious, especially if you've been eyeballing multiple rental properties for some time, but it’s essential if you want to avoid a bad investment property.
Here are some key things you’ll need to ask yourself before buying:
Are you buying old or buying new?
The great thing about new properties is that you can claim depreciation on your tax returns, and you end up saving quite a bit of money not having to do constant property maintenance like you would with older properties.
But as you might expect, getting around the high capital requirements can be a challenge, particularly for first-time investors. You might also lose those mentioned savings because of hidden commission and fees when you buy new properties from an agency.
Older properties can be more work, but are a great opportunity for property renovations to increase value. They are also more accessible since their price is lower, and can give you great capital gains if they're situated in growth suburbs in Australia.
What’s the condition of the property?
Are there holes in the walls? Stains on the carpet? Scuffs on the floorboards? Do the taps and lights switches work?
These obvious signs of damage are the things to keep an eye out for when you first inspect the property. Bring your magnifying glass and channel your inner Sherlock Holmes when you're inspecting a property. Any damages you find might be a good reason to not buy the property, or you could get the cost of fixing the damage deducted from the listed price.
Does it have features and amenities tenants want?
If your investment property is your business then your tenants are your customers. It might sound obvious, but it's an important logic to remember when you're sussing out the desirability of your rental property.
Always tailor your property so that it's aligned with your customers' needs. What's your target market? What do they want in a property?
We suggest reading our article on how to research what tenants want where you'll find a checklist of questions you should ask before you buy.
3. Cutting out the experts
Everyone's different, but we can assure you that asking experts for advice is usually a good idea.
It's very common that we have property owners bring us on board to help solve disputes or to help get the property portfolio in order.
If you feel like you're in over your head or if you need a second opinion, we recommend you go for it.
Here's some good experts that can help you out for various situations:
- If you have concerns about your cash flow or your taxes, an accountant can help.
- Any concerns about your mortgage or repayment of property loans can be brought up with your mortgage broker.
- If you need help doing a thorough property inspection you can bring a surveyor or real estate broker along.
- If you have problem tenants with lots of arrears, or just feel like managing your properties is taking too much time, you can hire a property manager to do it for you.
4. Not having a property investing strategy
If you’re going to become an owner, and a successful one at that, you need to first know how to get your foot in the door. That’s where an investment strategy comes in.
Most things in property come with a trade-off. Low-cost properties offer lower returns but are easier to buy, while high-cost properties are harder to get capital for but yield greater returns. Depending on what you have saved up, there's lots of different ways to get your foot in the property market.
- Say you have a close relative who’s willing to stake some of their home’s value to help you secure a loan. You could be looking at going the route of a guarantor loan.
- On the other hand, if you want to go at it yourself without having to cross the high-cost entry barrier, fractional ownership might be the strategy for you - buying shares in a single property and receiving a fraction of the rent and capital return if the property is sold.
Which option to go for really depends on your financial situation. This is why when people ask us "is now a good time to buy property?" we always say: "As long as you have your financial ducks in a row, it's always a good time to buy."
Check out our article on the 7 most common investment strategies for an in-depth look into what your options are for getting into the property market.
5. Not having a property financing plan
Do yourself a favour, and don't wing it when it comes to your property finance. Know exactly how you’re going to cover those ongoing costs like loan repayments and utilities.
Know your financial goals and how much risk you’re willing to take before you begin as well as what you can afford on a regular basis. If everything hits the fan and you lose your income, how many months can you cover your bases?
You should also consider whether you want to negatively gear your property or positively gear your property.
Negatively geared properties run at a net loss when your rental income and holding costs are calculated at the end of the year. About 60% of Australian properties are negatively geared because it comes with tax benefits, and unlocks higher capital growth properties.
Positively geared properties run at a net gain, meaning that your rental income is higher than all the costs of running and maintaining your property. The benefit is obvious - you get another source of income (albeit, a small one). While it has been the less popular option, positive gearing is becoming more popular in 2021.
Finally, you'll also have to choose between principal and interest or interest-only loans. We've made a dedicated article that helps you choose the best loan structure for investment property which we strongly recommend reading first.
6. Negatively gearing when you can’t afford it
Even though this strategy is a great way to reduce your taxable income and make big on the capital gains front, negative gearing comes with risk.
In the short-term, you'll always be losing money, and this is something you'll have to be able to wear out.
This is why you have to make sure you’re in a strong financial position from the get-go, so you're not forced to sell your property out of misfortune.
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7. Buying the wrong property
With so many properties to choose from, it’s easy to see why first-time investors unwittingly opt for the runt of the property litter. If you want to know how to avoid a dud investment property, here are the things to consider when buying a rental property.
Think like a tenant
There’s no use pouring thousands of dollars into a luxury renovation so you can up the rent when your property is right next to a university full of students on a budget.
You need to know what the tenants in the area are looking for in a rental property!
The less repair, the better
Keep your eyes peeled when you’re inspecting a property. The last thing you want is to buy a house that’s going to cost you a fortune in repairs and maintenance. Wall cracks, dampness, tell tale signs of pests are all red flags that should raise your eyebrows.
Don’t be a customer
There may come a time when some silver-tongued property marketer or flashy sales agent will try to sell you on an off-the-plan apartment. But never lose sight of the fact that these are salespeople, first and foremost. And what they want to sell you might not be what is best for you.
8. Buying for the short term
If there’s one truth about the property market, it’s that real estate needs time to appreciate in value. Time heals all, and it will heal your property investment if you give it a few years.
The longer you spend time in the market, the higher your capital gains will be, at least, according to Australia’s track record. Did you know house prices have jumped 412% since 1993?
Read our article about how to tell when it's the right time to buy real estate to understand exactly why time in the market always beats timing the market.
9. Not leaving enough to live on
As attractive as property investment might be, you should definitely think twice before diving in the deep end.
Don’t settle for something that clearly isn’t an investment grade property just because you can’t hold your horses.
Make sure you have stowed enough away to put down a decent deposit on a decent piece of real estate and have enough to cover those monthly loan repayments and holding costs for unforeseen mishaps.
Otherwise, you could find yourself in a constant state of financial stress, trying to cover your day-to-day expenses, while also worrying about whether you can sustain your investment.
A good rule of thumb is to have 2 to 4 months of rental income saved up as a financial buffer if you want to be avoiding this common mistake.
The property market isn't going anywhere, and we always recommend talking to a financial advisor before making the leap.
10. Selling out of fear
Once you’ve made it into the property game, upfront costs and all, the real estate investing mistakes don’t stop there. You still have to weather the storm that is the property market.
Lucky for investors, properties have shown to double in value every 7 to 10 years. The only downside is that during this time, there are bound to be downturns – a scary thing that drives many investors to sell prematurely.
So, don’t give into fear, and keep holding onto your property if you can help it.
11. Not hiring a property manager
If you're planning to self-manage your investment property, it's something you might want to reconsider. While you save a couple thousand dollars a year not hiring a property manager, the time and effort you spend really isn't worth it in the end.
In her book '59 Biggest Mistakes Made by Property Investors and How to Avoid Them' Helen Collier-Kogtevs makes this point:
"We managed our first property ourselves and I will never repeat the experience. [...] I recommend DIY property management only because it gives you a good insight into how much work property managers actually do to earn the relatively small management fee they receive each week."
There’s a reason 80% of property investors employ a property manager. If you think about it, it's more worth it to keep your job than to quit it to become a full-time property manager, when you can hire a professional to do it for you for a couple hundred dollars in property management fees.
We've assembled a complete guide with everything you need to know about property management, which we suggest reading through to help make your decision. You can also read our property manager vs self-managed comparison to help understand why self-managing your property isn't usually the best option.
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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you.
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