It is an unfortunate fact that many property investors stop after buying one property, because that one-time purchase proved unsuccessful in the current real estate market. This is far too common as many investors fail to prepare and plan for probably the biggest financial decision of their lives. The following are 10 common mistakes made by property investors. If you are able to learn from the mistakes of others, then I truly believe that you are on the right track for success.
Searching for the right property can be a time consuming and frustrating process. In today’s market, it is easy for an investor to naturally feel pressured to accept a seller’s offer if the property meets the buyer’s requirements. The problem with this, is that the investor tends to overpay for the property. This can lead to over leveraging themselves and taking on too much debt, resulting in higher repayments that they can’t afford.
Buyers should start searching for similar properties in the area they are looking in that have sold in the last few months. Websites such as realestate.com.au, Domain and RP Data can provide this information. This should give a fair indication of what comparable properties should be valued at. There are plenty of opportunities around, and if the deal falls over due to the seller wanting too much, then you should walk away. Being patient and moving on with the searching process will prove beneficial in the long term.
02) Think They Know Everything
Many buyers think they know everything. They think just because they have bought “a” property before, that they are automatically a property investment expert. Once a bad deal takes place, there is usually no one you can turn to to help fix the unfavourable transaction. Differentiating between investment stock, which is any property to investment grade which is where the true performance lies. Investors should be outsourcing to a number of resources and experts such as accountants, finance brokers, conveyancers, property inspectors, property managers and property consultants to name just a few. These experts should be more than qualified to warn you of any flaws or defects within the transaction. It is important to build a trusted team moving forward while building your property portfolio.
03) Not Saving a Big Enough Deposit
The bigger the deposit that you have saved up, the more options you have in getting into the market. This will prevent you from purchasing any cheap property simply because you wanted to get into the market. Cheap property is cheap for a reason. It usually means cheap returns long-term!
Sometimes holding off purchasing, and continuing to save money can prove better than purchasing a poor performing property. Also, by borrowing more than 80% it will most likely attract LMI (Lenders Mortgage Insurance). This fee only protects the lender in case you default rather than have any protection for you. Therefore, by having the biggest deposit as possible will actually make and save you money in the long term.
04) Getting Too Emotional
Sometimes investors buy property like they are buying their own home to live in. Many factors are important when buying your own home, such as the colour of the kitchen, the fixtures in the bathroom or the brand of your appliances. When it comes to investing however, letting your heart lead the buying decision is a common trap to be avoided at all costs. Allowing your emotions to take control will more than likely result in overpaying for the purchase.
Property investment is a numbers game. You should always purchase property based on analytical data. Factors to consider are capital gains forecast, rental return and location. These factors will help you make a decision on facts rather than feelings. Investing is all about the numbers, not the emotion.
05) Managing The Property Themselves
Many people assume managing a property is easy and think they can do it all when it comes to dealing with tenants, collecting rent or maintaining the property. This can become very stressful and tedious which is a job on its own. There are also increasing legislative requirements that fall upon landlords that manage their own properties.
A professional property manager is able to look after the whole process, from screening potential tenants, conducting regular inspections, maintenance and repairs, filling up vacancies and many other management services. By using their expertise you also minimise the range of risks you might not even be aware of such as legislative changes, smoke alarm regulation, safety requirements and many more.
06) Being Non-Negotiable
Investors may lose money in the short term by staying strong to their original rental asking price. This stubborn approach may result in the property remaining vacant and loss of rental income. For example, if the asking rental is $550 per week, this means that for every week the property is untenanted, then $550 is lost each week.
By slightly dropping the rent by say $20, investors may attract a potential tenant to sign a lease agreement. Instead of viewing this as a $20 loss, it could be viewed as a $530 gain. Then after 12 months, you can increase the rent by $20 after reviewing a new lease for example.
07) Underestimating Costs
There is a lot more to owning a house than just making the mortgage payment. Maintenance expenses can include gardening, attending to the lawn, and painting the fence just to name a few. Then there are costs associated with the purchase including stamp duty, legals and pest and building reports. Determining expenses prior to purchasing an investment property is paramount. All entry costs should be outlined before even making an offer on a property to ensure the property can be held for the long term by the investor. A qualified property consultant can help prepare and plan for these expenses.
There is always a temptation to sell your property, especially if you can see an increase in value. While this can be beneficial in some cases, holding on to the asset for the longer term is generally the best thing to do. Holding property for the long term will always prove a more profitable outcome. Speaking with a good finance broker and accountant could prove to have better alternatives. For example, refinancing the property and tapping into any new equity that has been formed since purchasing it while still holding on to the asset moving forward.