Property investment is a numbers game, but it’s definitely not an exact science – market conditions constantly change and there are absolutely no guarantees.
While there’s no shortage of information and advice available for those looking to start investing in real estate, it usually focuses on what an investor should do. Often, this over-simplifies the process and glosses over some of the biggest potential risks.
Whether you’re just starting your investment career or are looking to refine your expertise, these are the most common mistakes we’ve seen investors make.
1. Not doing their homework
Many investors make decisions based on general media comments or the advice of friends or family. While you may be able to draw on information in the media or the expertise of others, however the best approach is to carry out your own thorough independent research and make a decision based on your findings.
Before you buy, you need to understand what the local market is doing and the factors that impact its performance. To work this out, you need to watch the market closely, investigate past performance, look at infrastructure, zoning, future developments etc and do your due diligence. If you don’t have time to do this, you might want to consider engaging an independent buyer’s agent.
2. Not having a plan
A lot of first-time investors buy because they want to make money in real estate and have heard that real estate is a ‘secure and safe investment’. While this is can be the case, it generally results in moderate returns and is one of the main reasons only 18% of investors own more than one investment property.
While investment planning can be complex and time-consuming, you need to have a clear view of what you want to achieve and how you want to get there.
Whether it’s to create a passive income that’s equivalent to your annual income, to build a portfolio that can support you in retirement, or to create a legacy for your children; your goal will inform all your investment decisions. Once you know your goal, you can plan the best way to achieve it – this could be by:
- Actively reducing the value of your loans to create an income
- Renovating your properties to create capital growth
- Refinancing to buy additional properties
- Holding properties for 7 – 10 years, then selling them to pay off the loans.
Your plan should reflect your personal circumstances and you may want to consult your accountant, financial advisor, or mortgage broker.
3. Waiting for the perfect time / opportunity
Some people try to negate property investment’s inherent risks by waiting for the market to bottom out or holding out for a bargain price. As a result, they miss many great opportunities and their portfolio grows very slowly (if at all).
While prudent investment requires a level of cautiousness, there is no such thing as the perfect time or opportunity.
It is important to understand your appetite for risk and plan your investments accordingly. Do your research and always avoid the top of the market, but if the numbers stack up otherwise, make the move.
4. Where to buy
The natural inclination for most investors is to buy local and look for properties they would like to live in. Often this is not the best approach and results in lower yields.
While it’s important to look for properties that have owner-occupier appeal, it’s more important that the numbers stack up.
Don’t just look local – consider what your budget can get further afield, including interstate and in regional areas. Once you’ve picked an area, research the demographics and target properties that are in demand in that area. Also, as a general rule, you want to look for properties that will deliver a 4% – 5% return.
5. Playing the short game
More than 70% of investors sell their property within 5 years of purchasing it. This usually means they do not realise much capital growth and receive minimal returns.
More often than not, real estate should be viewed as a longer-term investment.
Given the market is constantly fluctuating, it is usually better to hold on to a property for 8+ years. This allows you to take advantage of the compounding effect and ride out the highs and lows of the natural market cycle.
6. Not having an exit strategy
As many investors believe that property is a safe investment, they maximise the capital they outlay. This may not be an issue when the market is strong, but if there is a downtown – or any unforeseen life events – it can cause significant financial stress.
While you don’t want to plan to fail, having a safety net of funds is critical.
Having a cash buffer will allow you to endure any unexpected needs, unplanned vacancies, or interest rates increases. Most experts suggest that, in the current property market, you should have a reserve of at least 10% of your debt.
7. Failing to maintain / improve the property
Some investors – particularly first timers – buy a property and leave it to take care of itself. This may reduce ongoing costs, but it can also limit rental returns and capital growth.
While maintenance and improvements may take time and money, they are critical to keeping tenants and maximising your returns.
During routine inspections, or when a tenant moves out, you should check to see if any maintenance or improvements are needed. This will help keep your tenants happy and make sure the property is well presented. It could also save money in the longer term, as regular upkeep can prevent the need for major repairs.
8. Getting the rent wrong
When deciding on a rental rate, the temptation is to go as high as possible. This can alienate potential tenants and increase the vacancy time. Then, once a property is tenanted, most investors just leave the rent rate as it is, missing out on opportunities to increase their returns.
While you want to maximise your yield, having your property sit vacant – or not adjusting rental rates in line with market changes – can quickly eat into your income.
Do your research when listing your property for rent and set a rate that is comparable to other similar properties. Then, each time the lease is renewed, review and adjust (if appropriate) the rate.
9. Setting and forgetting the finances
When it comes to finances, most investors only think about getting the mortgage and making sure repayments are being made. In doing this, they overlook the finer details of investment financing, which could be costing – or saving – them money.
While investment financing can be very complex, it’s important you understand how it works and the best ways to minimise your expenses and maximise your returns.
Not all debt is created equal, so you should focus on paying down non-tax-deductable debt first. You should also regularly review your interest rate and insurance premiums, and have a depreciation schedule completed.
10. Trying to manage the property yourself
Some investors are choosing to manage their properties themselves, while this may save on management fees, it can be very time consuming and could result in legal issues.
While property management may seem simple, it’s worth considering hiring a professional.
Outsourcing your property management will free you up to focus on the next step in your investment plan. It will also help make sure that you’re compliant with the latest legislative changes.