Property investment is a proven way to accumulate wealth and personal security, although there are many pitfalls if you are unprepared or impatient.
The purpose of an investment property is to bring in some kind of return, either through some income from the rent or the increased value over time or ideally, capital gain and ongoing income. Yet many property investors stick with a property that is actually losing them money, and this situation can often be traced back to their earliest moves into the property market.
Here we look at some of the top property investment mistakes and how to avoid them.
Not Enough Research
Always verify and double-check any information about a specific location and price data. See if there are any plans for development in the area that might affect the value of the property you are interested in buying. Look for multiple independent sources of information, as you don’t want to be misled by someone who has an agenda. For example, properties that are selling for below market price are usually cheap for a reason – there may be a structural issue with the house or the local council might be planning development in the area.
Poor Financial Foundation
All your investment plans can unravel if you don’t start with a solid financial foundation. Be wary of high-interest loans, especially if they are structured to be tempting in the beginning. Learn all you can about the most financially sound way to set up your investment so you increase your equity rather than lose money in excessive interest payments.
If you are purchasing a unit, you need to consider all the additional costs such as strata fees. You need to set a strict budget and keep checking the numbers. If your investment property isn’t turning a profit – even a small profit – then you need to let it go.
Bad Management of Cashflow
Your property may not generate enough income to cover the cost of maintenance, rates, taxes and management fees, particularly in the beginning so you will need a comprehensive budgeting plan and a long term strategy to ensure you always have the cash flow to maintain the property.
When you are planning to purchase an investment property, a good rule of thumb is to budget an additional 10% of the property’s value to cover costs until the property becomes more self-sufficient.
Misinterpreting the Market
Many inexperienced property investors fail to ask the most essential question of all – is this property an appealing rental prospect? Do some research into the local area and find out what types of properties are in demand for tenants, and what types of tenants you will attract.
Check out the property at different times of the day to see if there are any glaring issues that may drive tenants to leave as soon as their lease expires – noisy neighbors, heavy traffic, or just an inconvenient commute to the local shops could make it difficult to rent out the property in the long term. You should also calculate the average rent in the area to see how it will cover your costs.
Lack of Strategic Planning
Like any investment plan, property investment is more successful if you start with a long-term plan. Property investment is not a “get rich quick scheme” – it takes time and patience to build the value of your portfolio. You will have more success if you start with a specific long-term goal, as then you can weigh all your decisions based on how they will contribute to achieving this goal.
Confusing Lifestyle Goals With Investment Goals
If you purchase a beachside investment property, it can be tempting to use the property as your own holiday house, but this will cut into your investment return. There are considerable costs involved in maintaining a holiday home to a professional and competitive standard, along with all the usual costs of maintaining a property. If the rent you receive on the holiday house already covers all these expenses, then you can convert your “profit” into the occasional holiday of your own. But if you consistently use the property for you own holidays, then you will make no progress with your investment and your holidays will become increasingly expensive.
Starting with a “Free Seminar”
Beware of any “free seminars” where the self-proclaimed expert invites you to participate in the deal of a lifetime. The true benefit of property investment is the freedom to build your wealth independently, rather than making someone else rich through your efforts – yet these “experts” are working to sign you into a scheme that will cost you money and make them rich. Save your money for your own property investment, don’t contribute to someone else’s wealth creation scheme.
Whether you are just starting your investment journey or you are a seasoned property investor it is worthwhile that you seek expert advice from a Finance Broker, Investment Property Expert or Financial Planner.
Contact us today to discuss your financial goals and see how we can help you.