By revealing some of my best and worst investment decisions to date, I hope to provide invaluable insights for property investors just starting out and those already in the game.
Below is a summary of a section in my book that covers what I believe to be the 10 most commonly made faux pars by first-time investors. Avoid these stumbling blocks and you'll have a far better shot at becoming a profitable property investor.
1. Strategy (or lack of):
Strategy involves having a game plan, an idea of where you're heading and how you intend to get there. Without a coherent plan of attack to create a property portfolio, you are almost certainly setting yourself up for failure.
Put pen to paper and consider your approach to investing, including whether you’ll go for income or capital growth, negative or positive gearing, new or established housing, short or long-term investment, houses or units or perhaps a combination of all of the above.
Whatever your method may be, you must plan your action and then action your plan.
2. Analytical, Not Emotional:
First time home buyers will make a purchasing decision based on 90 per cent emotions and only 10 per cent logic. As an investor, you must reverse this ratio and make judgments based on 90 per cent logic or analysis and 10 per cent emotion.
When you talk yourself into desperately wanting a particular property because you have formed an emotional attachment to it, you will be far more likely to pay too much and over-capitalise on your investment.
You have a greater chance at nabbing a bargain if you can detach yourself from the entire buying process (and the property in question) and cease negotiations at your pre-determined "walk away" price, knowing there will always be another opportunity around the corner.
Separate your emotions from the hard financial facts and you will make far better investment decisions.
3. Headlong Rush or Dithering Fence-Sitting:
There are two extremes with many property investors: those that rush out after being inspired by a book or seminar and buy the first property they come across (often paying too much and buying the wrong type of investment in the process), and those who attend seminar after seminar and over-analyse the investment journey to the point of complete inaction.
The former at least make a start and may learn from their mistakes, whereas the latter never overcome their fears long enough to actually make that initial purchase. Try to find a happy medium; avoid the headlong rush or the fence-sitter stance and you'll be making one less investment mistake.
4. Profit Impatience:
Property investment will not make you a millionaire overnight, rather it is a long-term prospect that lacks the volatility in values of other commodities such as shares.
This is the strength of bricks and mortar - its ability to provide a steady gain in value over time. To be successful in property investing, you need to allow the power of compounding to work for you; whereby your money will earn more money and your interest will accumulate more interest.
Let's look at a scenario where you're given the choice to receive $20,000 a day for 30 days or just 1 cent on day one that doubles every subsequent day for the same timeframe. After day 10, that one cent is worth $10.23; after day 20 it's worth $10,475.52 and by day 30 it has compounded into $10,737,418 - far more than the $600,000 you would have gained by taking the $20,000 per day option.
The lesson being you will make more money on your investments when you let time be your ally and patience your friend.
5. Improper property selection:
The logic here is simple. Don't buy an apartment in the outer suburbs where family homes are most in demand and vice versa. Being close to amenities such as schools, shops, sporting and medical facilities can often increase your profits, but don't buy right on their doorstep as this often makes a property less liveable.
6. Insufficient Research:
Glancing through the local paper to get a rough idea on property prices in an area is not enough. Talk to real estate agents, the Real Estate Institute in your state, neighbours, the local council, the water authority, body corporate managers if applicable and the tenants and property manager if the home is currently let.
The bottom line is don't skimp on research - it's far too valuable.
7. Overestimating Income and Underestimating Expenses:
If you fail to plan, you plan to fail, particularly where dollars and cents are concerned and you'll have no one to blame but yourself.
Gain an idea of how much rental income you can expect to achieve by seeking median rental figures from the relevant Real Estate Institute and local property managers. Attend open homes to see how much the market is willing to pay for properties similar to the one you're considering. On the flipside, ensure you allocate enough funds for all potential expenses you'll incur whilst holding the property.
You are far better off over-estimating than under-estimating here, so consider a vacancy rate for about double the average, allow 10 per cent more for every outgoing including council and water rates, land taxes, insurance, management and strata fees, maintenance and interest charges because these will often increase unexpectedly.
Examine each potential investment analytically and ensure you make adequate allowances. By underestimating your income and overestimating your expenses you're more likely to avoid any nasty surprises.
8. Inappropriate Financing:
Look for the longest term, lowest overall cost loan with a fixed rate - don't focus on the interest rate alone. Remember that this is a long-term purchase of a long-term asset and as such, needs to be financed adequately.
You should also consider how accommodating your lender will be when you're ready to make your next investment purchase.
9. Property Inspections:
During the initial inspection you conduct on a property, you should not only be examining the home itself, but looking for clues as to the vendor's personal situation. For instance, if there are family photos displayed, yet only signs of one occupant, the seller may be going through a separation or divorce.
Although it may sound a little callous, this gives you an opportunity to buy a bargain whilst giving the previous owner a chance to move on with their lives. Examine the property carefully both inside and out. Are there any signs that work has been done to cover up a more serious problem, such as cracks that have been plastered over?
Thoroughly inspect all rooms taking note of paintwork, floor coverings, indications of damp or peculiar smells. Turn taps on to test water pressure and test appliances for any faults. In general, get a feel for what it would be like to live in the property so you know how your tenants might find it. Are they going to be comfortable in the home and if not, what would you need to do to make it more accommodating?
Be thorough and always do a second or third inspection at different times of the day to gauge how the property looks in different light and how its surrounds could impact on it, such as nearby road noise, etc.
Take photographs of the interior and exterior to assist when you come to conduct your final inspection, which you are entitled to do within seven days prior to settlement under the General Conditions for Sale of Land. During this visit you should ensure that everything is as it was when you purchased the property and that no fixtures noted in the Contract of Sale have been removed. It's also crucial to obtain professional building and pest inspections as a condition of your offer so you know exactly what you're buying. They may cost you in the vicinity of $300 to $400, but it's well worth the investment.
10. Self Managing Properties:
Some investors believe that paying a property manager to look after their investments is throwing away income that could be lining their pockets.
I certainly did. I started out thinking I could do it all myself. Then as I added to my portfolio, the everyday nuisance of dealing with tenants became more of a burden than a blessing. Worrying about the little things that concerned my tenants was eating into precious time that I could have been utilising to further my investment goals.
It can be difficult to find appropriate tenants and with the laws governing rental properties constantly changing, the risk of being sued is far greater than ever. If you have the time, energy and patience to devote to self managing your investments, then go for it. But think of how much money you could make pursuing other opportunities rather than unblocking a sink or waiting on a tradesman to show up.
How much better could your lifestyle be knowing that you have a professional on your team, whose full time job is looking after your property?
So there you have it. Hopefully this list has opened your eyes to some of the potential problems that can really put a spanner in the works if your property investment career if not adequately addressed.
No comments:
Post a Comment