Property investing is not simple – it may seem easy but really, it’s not. If you buy investment properties, it requires a great deal of money that you merely can’t afford to throw away. Besides that, there are some legal matters which may be complicated for you to handle on your own. To make things worse, you may even be given conflicting information and advice.
This whole journey can be quite intense that’s why most investors make errors that result in loss of money and time. But know that you can make better decisions when you understand all the information and opportunities you’re dealing with.
If you want to avoid these costly mistakes, it is worth investing in education. We can’t all be experts in every field or niche so it’s recommended to ask or even pay for help.
Avoiding these common missteps in rental property investing can spell the difference between a successful and a bad investment property. Your capital growth and financial stability will be at risk if you will not undertake due diligence.
Here are the most common blunders to avoid in property investing to help you stay in the right direction.
1. Using your emotions versus your head in investing
Although we know that we are rational in every way, what we can’t help is to let our emotions take control as we purchase our abode. If you’re talking about your investment property, do not let this happen at all.
A successful investor means handling your property just like any other business, giving less attention to your emotions and should be more about the numbers.
Imagine this: You went to a public home inspection in an area that you like. You love how the house looks and feel that you are in the perfect neighbourhood. Meanwhile, the broker told you that they’ve been deluged with many offers and need to make the decision. You need to think fast lest you fail the chance to own this property that you like. The so-called ‘Fear of Missing Out’ coupled with a lot of different emotions surprise you.
Our recommendation is simple: You can give up buying this property! Why is this so?
The wisest thing to do in this situation is to delay your decision to the next day and take some time doing a careful and detailed analysis of the property’s rental yield and capital growth.
Aside from the act of buying and selling properties, considering it as a business includes the following:
- It’s better if you will not allow family and friends to rent your property.
- Do not become too much obsessed with your property.
- Hire a property manager to ensure decisions are made objectively.
- Increase the rent when you know it is time to do so.
Preventing you from committing the most typical mistakes in the real estate industry means being objective and analytical, even to a fault—- that should always be your game plan.
2. Not spending enough time on research
In the rental property world – if you neglect or fail in your research, you are solely to blame.
It’s a given that doing substantial research can be dreary on your part, more so if you’ve been eyeing multiple properties all at the same time — it is quite crucial if you want to avoid a property that you will regret having later on.
Listed below are some of the key points you need to ask yourself before taking the plunge:
Do you prefer an old property or a new one?
The advantages of new properties:
- The benefit of depreciation on your tax returns;
- Savings on repair and maintenance costs.
Expectedly, it might be a bit of a challenge to consider the high-capital requirements, especially for those investing for the first time. There is also the loss of savings as you are paying for commissions and other hidden fees if you get properties from an agency.
No doubt, older properties will be more taxing, but with property renovations, they’re good opportunities to increase the value. Besides, they will be more accessible to buyers since the price is lower. They can provide high capital gains if they’re situated in the growth suburbs/locations in Australia.
Is the property in A-1 condition?
Are the taps running? Do the power switches function well? Do you see any distinguishing marks on the floors? Are the walls free of holes and scratches?
These palpable signs of damage are what you need to watch out for closely first and foremost when you inspect the property. Always have the mindset of a shrewd investigator. There may be gaps and issues that might redirect you from buying the property. Perhaps, you could ask that the costs of fixing the damage be subtracted from the price on the listing.
Are the features and amenities attractive to tenants?
Your tenants are your customers if your business is your investment property. This is an important approach for you to remember when you’re checking out if your property is sought-after.
Tailor-fit your property so it supports the customer’s needs. Who is your target market? What are their preferences in a property? These are questions you have to ask and answer yourself.
3. Refrain from seeking the experts’ help
We are all different but it is always a good strategy to work alongside a team with proven experience and practical skills to help in solving conflicts and getting your portfolio to be as organized as possible.
If something is not clear or if there’s a need for a second (or third) opinion, by all means, check with the experts.
Below is the list of some of the best experts you should seek out for help or advice in different situations:
- For concerns on the financial matter like taxes, cash flow, and more – seek an accountant’s expertise.
- For overall concerns regarding the mortgage, including property loans repayments – discuss them with your mortgage broker.
- For an exhaustive property inspection, employ the services of a surveyor or a real estate broker.
- For problematic tenants with significant arrears, or if handling the property is your concern in time management, hire a property manager to act on your behalf.
4. Not engaging in any property investing strategy
If you’re going to become a business owner and a successful one to boot, you need to know how to make that first step in property investing. And this is where the investment strategy should come in. Having an inital goal and a strategy from the very beginning will steer you in the right direction.
When you talk of property investing, most things come with a trade-off. A big factor depends on what you’ve saved up or money you are willing to put in. Depending on your budget, there are various approaches for you to get your foot on the door. The high-cost properties are more difficult to provide for capital. though they yield higher returns. The low-cost properties, on the other hand, are easier to acquire, however they offer smaller returns. Which is your bet?
For instance, you have a cousin who’s willing to give up some of his property’s value to assist you in getting a loan. You may be looking at having a guarantor loan as a strategy, in this case.
Conversely, if you want to do it yourself without going through the high-cost means, fractional ownership is the ideal strategy for you. This means buying shares in a single property and then getting some parts of the rent and returns from the capital once the property is sold.
Whatever strategic option to go for really depends on your present financial situation. This is the reason why when people ask – “Is now a good time to buy a property?” our answer is always like this: “Buying a property is always a good time especially if you have all your financial ducks in a row.” It pays to be well-organized, cautious and prepared to avoid any mistakes.
5. No financing plan in property investing
Property finance is an important aspect of investing. Make sure you plan well on how you will cover all the payments for the ongoing costs like repayments of loans, utilities, and other miscellaneous costs.
Plan and execute your financial goals well. Know how much risk you’re willing to take when you start your property investing journey. Consider also what you can pay for on a regular manner. If everything hits rock bottom and you lose your income, for how many months can you cover your bases and not be forced to sell?
Another point to consider is If you are going to negatively gear or positively gear your property.
The negatively geared properties’ year end calculations result to a net loss afer holding costs are deducted from the rental income. Truth to tell, about 60% of Australian properties are negatively geared as it can help reduce tax obligations and result to higher capital gains.
On the other side, the positively geared properties are mostly at a net gain. This means that your rental income is more than all the running and maintenance costs of your property. The value is quite distinct as you earn income from another source, although, a small one at that. Positive gearing is usually the unpopular choice, but until recently has become more practical in 2021.
Finally, you will also have to select the right financing option: interest-only loan or principal and interest, variable or fixed home loan. Know all the financing options available for you when you buy your property and choose the best one suited to your personal situation.
6. Using negative gearing erroneously as a strategy
Negative gearing is quite risky although this approach is an excellent way to reduce one’s taxable income and make capital gains. Use it only when you can afford to do so as you’ll consistently be losing money in this strategy, ideally for just a short term.
This is the reason why you have to be in a strong financial situation from the usual get-go, so that you will not be compelled to sell your property in case of any future adversities.
7. Purchasing the wrong property
With several properties available for you to select, it is clear why first-time investors unsuspectingly go for the so-called ‘runt of the property litter.’ You should know how to avoid an investment that will be considered worthless in the end. What are the considerations in buying a rental property?
Here are some of the things you need to know and do:
Know what the tenant likes and thinks.
It is useless to spend a lot on a lavish renovation or upgrade to increase the rent when the location of your property is across an establishment that is not fit, say, for instance, a public university whose students are on a tight budget.
Know what requirements or needs tenants are looking for in a rental property in the area.
Watch out for red flags: the fewer or zero repairs, the better.
Be on the alert when you do property inspections. Of course, you do not want to end up buying a house that will cost you a lot of money to fix. You should keep your eyes open with all the prowling red flags, such as dampness, wall cracks, tell-tale signs of pests, and more.
Do not act like a customer.
Be wary of many sweet-talking property marketers or loud sales agents who will convince you in buying an off-the-plan unit or apartment. First of all, keep in mind that these are salespeople who might want to sell you something that is not best or right for you at the moment.
8. Purchasing only on a short term basis
Time and again proves that in the property world, real estate takes time to appreciate. Watch out for a few years and surely, your property investment will grow. A little patience goes a long way.
The fact is that house costs in Australia have significantly risen to about 412% since 1993. It seems that the longer the period you spend in the property market, the bigger your capital gains will be – at least as attested so far by Australia’s track record.
9. Not having enough savings to thrive on
Although property investing is quite attractive, you must certainly think about it a few times before plunging into the scene.
Be patient and do not decide on anything you fancy – make sure that it’s a good investment-grade property. It pays to wait for the right time.
Make sure you have put enough away to make a proper deposit on an appropriate piece of real estate. Have enough money to cover those holding costs, as well as monthly repayments in case you’d be faced with unforeseen emergencies.
Or else, you might end on a very tight financial situation, struggling to meet daily expenses and also worrying for how long you can continue the investment.
A rule of thumb to follow is this: Have 2-4 months of rental income set aside as financial buffer if you want to avoid this usual blunder.
The property market traditionally goes thru ebbs and flows. It is best to discuss with a financial advisor before you decide and commit to anything.
10. Selling out of being anxious
When you made it into the real world of property investing with all its straightforward costs, do you think that you’d be free of blunders? Think again. You still have the whole property market to conquer.
But the good thing is that properties have increased two-fold in prices every 7 to 10 years. The only disadvantage is that there are possible slumps at this time – quite an alarming warning that compels investors to sell prematurely.
Just lay your anxiety aside if you must while keeping a tight grip on that property.
11. Not having a property manager
You might need to reconsider if you are self-managing your property. If you think you are saving on costs, know that the amount of time and effort you spend doing it is not worth it in the end.
Why do 80% of property investors hire a property manager? It is more practical for you to get the services of a full-time property manager and pay him management fees than you having to leave or quit your job. Think hard about it. This will be one of the wisest decisions you can make in your property investment journey.