Property Investing: Avoid These Mistakes
Investing in property may be your path to long-term financial success. However, you must avoid the common property investment mistakes that trip many novice investors up.
Once you’ve established yourself in your career and begin earning a strong income, you may consider investing. When done well, investing can set you up for a comfortable retirement. However, there’s always a risk involved. Get it wrong, and you could lose money.
Many novice investors choose property over stocks and shares.
So why is property a great investment?
For one, the housing market moves at a slower rate to the daily markets of stocks and shares. This gives investors more time to react to changing circumstances. Property investment also generates consistent yields, plus you’ll usually gain money when you sell the property.
However, that’s all conditional on avoiding the major property investment mistakes. Here are nine that could thwart your investment efforts.
Property Investment Mistake #1 – Getting Emotional
Buying an investment property is not the same as buying a home for yourself. The key thing to remember is that what you want doesn’t matter. It’s all about your tenants.
Allowing emotion to affect your decisions may lead you to investment disaster. Yet many novice investors still do it. You may love a certain feature in your property, but you can’t guarantee your tenants will. Your personal tastes aren’t grounds for buying a property.
Emotion may also lead to you spending more than you should. You bid based on how much you want it, rather than on how much it’s worth to you in the long-term. This is a subtle difference, but an important one. Your investment property is a money-earner, not somewhere that you’ll live for years to come. Base your decisions on what the renter’s market wants from a property.
Property Investment Mistake #2 – Repaying All Your Debts Simultaneously
This seems counterintuitive. After all, paying all your debts usually puts you in a better financial situation. It seems natural that you’d get rid of as much as possible so you can take on the burden of property investment.
However, no two debts are the same. Some have benefits that you may not realise. For example, you may be able to claim tax back for some of your debts. Savvy investors can use this fact to develop their portfolios, with the right financial advice.
If you do want to repay debt, focus on non-deductible debts. Personal loans are a good start. Get rid of them, while deducting your other debts from your tax bill. You’ll boost your credit score too, making it easier to buy other investment properties.
Leave the investment property loan until last. That doesn’t mean you should avoid your mandatory repayments. However, don’t make any extra repayments until you’ve cleared your non-deductible debts.
Seek the advice of a tax expert to create a plan.
Property Investment Mistake #3 – Not Having a Plan
What do you hope to achieve with your property investment? If you don’t have an answer, you’re not ready to invest.
The key question to ask yourself is “should I invest for growth or yield when buying a property?”
The answer depends on your circumstances. Investing for yield offers a stable, monthly income. However, focusing on growth gives you a nice lump sum at the end of your ownership.
Regardless of which you choose, make it the basis of your investment plan. Figure out how you want the investment to end, then work backwards. Create goals, covering all the milestones you must reach to make the investment a success.
Without a plan, you can’t anticipate the effects of any changes you make to the property. You’ll also struggle to compete against more seasoned investors. Investment is a journey, so treat your plan like a roadmap. It’ll guide you at all stages of the investment.
Property Investment Mistake #4 – Not Getting a Depreciation Schedule
The interest isn’t the only thing you can deduct from your taxes. In fact, you can claim for a huge number of the assets inside your property. To do that well, you need a depreciation schedule.
Depreciation schedules measure how each asset loses value over time and outlines how you can maximise your claims for them.
You can claim for Plants & Articles and Capital Works. You may also be able to claim for common items if you’ve invested in a unit in an apartment block.
You need a Quantity Surveyor to create the depreciation schedule for you. These professionals know what you can claim for, and how you can get the most out of each item. You may spend a few hundred dollars on the survey. However, it will save you hundreds, or even thousands, of dollars on your tax bill.
Finally, have the property re-surveyed whenever you renovate or replace an asset. You can claim a scrap fee for the old asset, plus you’ll reset your depreciation schedule on the new one.
Property Investment Mistake #5 – Diving Right In
So, you’ve seen a great property and you want to invest. Perhaps the seller has told you all these great things about tenant demand. Or, a developer has you convinced that it’s in a growth area and will generate returns.
That’s a sales pitch. Don’t let it make the decision for you.
Conduct due diligence on every property you consider buying. If you don’t, you run the risk of buying a property that won’t generate any returns. You may miss crucial issues affecting the investment.
Look into the demand for properties in the area, and how much tenants typically pay. Check for local amenities that serve the needs of the tenants you want to attract. Finally, use a buyer’s agent to learn more about the local property market. This information proves far more reliable than what a seller tells you.
Don’t allow a seller to pressure you into a purchase either. New opportunities come along frequently. If a seller tries to force your hand, take it as a sign that something may be wrong.
Property Investment Mistake #6 – Allowing Rent to Stagnate
With tenants in place, your investment property starts generating an income. Many investors leave their rents as they are for years at a time. This keeps the tenant happy, but it means you’re earning less than you should from your property.
The rental market moves at a faster pace than the buyer’s market. Demand increases regularly, and you must adjust your rents to meet it.
Review your rents every year. Compare them to what others charge, and consider the demand for your property. You’ll often find that you’re undercharging your tenants, and thus making less than you should from the property.
As a general rule, increase your rents by about $10 to $20 every year. This is a small enough increase for most tenants to absorb. It also means you don’t wait several years before hiking the rent up by a couple of hundred dollars, thus making your tenants unhappy.
Property Investment Mistake #7 – Expecting Short-Term Gains
Property investment is nothing like investing in stocks and share. With the latter, you can generate returns in a matter of weeks. Property is for those who are in it for the long haul.
You’re in for a rude awakening if you expect to get rich quick from property investment. Think of it more like a second job. You have to invest time and money into maintaining the property so that it generates an adequate return.
Novices should treat their first property investment as a way to boost their current income. Don’t quit your job unless you’re financially secure enough to commit to full-time investing. Over time, you’ll understand the market better, paving the way to future investments.
Furthermore, don’t dump all your money into the investment with the expectation that you’ll get it back quickly.
Property Investment Mistake #8 – Being Inflexible
Keeping your tenants happy is the key to successful property investment. Unhappy tenants mean less demand and a damaged reputation. New tenants may not want to rent from you because of the experiences of others.
Being inflexible can make tenants unhappy. This starts with your asking price. The data you collect should inform how much rent you charge. However, it’s still possible to get it wrong. If you charge too much, tenants will look elsewhere. Don’t make the mistake of clinging to your original figures if the market proves them wrong. It’s a balancing act between what tenants want, and your knowledge of the property’s value.
Furthermore, build some flexibility into your tenancy agreements. For example, agreeing to have pets in your property could result in higher yields. You take on some risk, as pets could damage the property, but your flexibility also raises demand.
Property Investment Mistake #9 – Not Getting Help
Ask yourself “how much can I afford to spend on a property?”
Are you confident in your answer? If not, you need to draft in some professionals to help you on your way.
Start with your home loan. Instead of spending time researching every possible loan, have a mortgage broker do it for you. They understand the industry better than you, and their work allows you to focus on other issues.
It’s also worth working with a buyer’s agent when you start searching for a property. They have access to useful industry information. Furthermore, they have negotiation skills that prove useful when you’re trying to get the best price.
Going it alone is often a mistake for all but the most seasoned property investors. You may not understand the market as well as you should, which leads to bad choices.
If you can avoid these mistakes, you increase your chances of success in property investment. Conduct thorough research and learn about the responsibilities of property management. Call on the experts to fill any gaps in your knowledge.
Preparation is key. You must be ready to take on a lot of extra work if you’re to make your investment a success.
Cohen Handler can help novice property investors get started. Our buyer’s agents can find investment properties that suit your budget, and they’ll help you to negotiate a fair price. Contact us today if you’re interested in property investment.