Our other title for this tip sheet it "Why many Property Investors do it once and do it wrongly". We've seen how property investment has literally changed our client's lives, creating wealth and security for their future, but we've also seen how people have made a "bad job" of property investment and the financial and emotional cost to them. We sincerely want to help people which is why we put together this tip sheet.
13.1. Not using a specialist team to lead you through the process – property investment adviser, mortgage broker, accountant, conveyancer, property manager and financial adviser
It is vitally important for a property investor to use experienced, reputable and professional advisers. Many investors try to do as much as possible themselves to save costs or engage the cheapest service providers. In most cases this leads to delays and ends up costing the investor much more than if they had used the best team of support specialists.
Such specialists can help the property investor:
- select and purchase the most suitable investment property
- set formal goals that are measurable and have a time frame
- maximise the tax advantages of owning an investment property (e.g. by obtaining a depreciation schedule)
- purchase the property in the most suitable name(s)
- minimise the impact on cash flow (e.g. by lodging a tax variation form)
- establish the most suitable finance structure
- obtain the most suitable tenant and reduce the risk of vacancy
- obtain advice on their overall financial plan for the future
13.2. Making property investment decisions based on emotion rather than logic and research
Common emotional decisions are:
- purchasing property in the local area only. This is based on the belief that it only makes sense to purchase property where “we can keep an eye on it” and “make sure the tenants are looking after the property”. This is an emotionally based decision and in many cases leads to a poor investment.
- so many people purchase an investment property using the same emotion as they would when buying a home to live in, e.g. properties with ocean views, large land holdings in “hobby farm” areas
- spending money and time on colour schemes and other items that do not improve rental return
- purchasing property based on advice from friends and family members rather than using research, logic and specialist advisers
- purchasing an investment property in an area where they go on holidays and where “we would love to retire” or where their son or daughter have somewhere to live when they leave home, e.g. when they go to university
- using logic and research instead will reduce the risks of investing and maximise your chances of successful property investment.
13.3. Purchasing property in regional areas that have strong rental returns
If your goal is to provide for your financial future it is important to purchase properties that have consistent strong capital growth whilst at the same time providing a consistent strong rental return. The continued capital growth provides the asset for your retirement and the consistent rental return allows you to hold the property without significantly affecting your cash flow / lifestyle.
Many novice investors are tempted to purchase property in areas where the rental returns are relatively high. Such properties are usually in regional areas where capital growth is inconsistent and unreliable. Typically they are reliant on one industry to fuel the demand. When that industry suffers a downturn or closes, rental income can plummet, vacancy rates increase and property prices fall.
Examples of this are mining areas and regions largely dependent on one major employer (e.g. an aluminium smelter or a car manufacturer).
13.4. Purchasing incorrect type of property / not diversifying
The choice of property type is very important. Usually a good investment property is one that has low maintenance costs and is attractive to a wide range of tenants that require a long term lease. Common mistakes include purchasing the following types of property:
- older properties because they are cheaper (these have higher maintenance costs)
- home units in seasonal holiday areas (lack of consistent rental income)
- "unique" architecturally designed houses (higher building costs and fewer buyers if property is sold)
- properties that require high maintenance costs (adds to holding costs)
- steeply sloping blocks (higher construction costs)
- home units with very high strata levies (adds to holding costs)
Another mistake is purchasing all investment properties in the same geographical area. When investing, diversification is an important consideration. A geographical spread of properties will reduce risk and allow the investor to take advantage of various property markets in different stages of their growth cycles.
13.5. Setting up finance incorrectly
The most common mistake here is to have all loans (including an investor’s own home loan) with the same lender. This increases risk by:
- Not having the best loan available
- "Cross collateralisation" i.e. all properties owned by the investor securing all their loans. This increases the risk of forced sale of the family home if there is a default on any investment property loan
- Having one lender controlling all properties owned by the investor
- Severely restricting the purchase of additional properties, especially if the lender has restrictive borrowing policies
- Adding to costs involved and complexity with additional borrowings, e.g. if additional loan required, all properties need to be revalued.
Other common finance mistakes include paying principal and interest on the investment property loan – any available cash should be used to reduce personal debt.
13.6. Not setting goals
This is another vital component of the investment property process. Many people purchase a property merely because they think it would be a good idea. They have no formal plan.
At the very least, property investors should have a written plan that has goals which are measurable and have a set time frame.
An independent financial adviser can be an additional valuable resource with an overall plan.
13.7. Procrastinating and not doing anything at all!
Think about the facts - if you do nothing:
- Could you live on $400 a week in retirement?
- Do you have enough saved for 25 years of retired life?
- Will you be able to afford a holiday when you retire?
- Are you working hard just to get by?
- Will you have anything in the future to show for all your hard work now?
- Are you getting ahead?
- How are you going to manage when your income more than halves in retirement?
- Do you want to rely on government hand-outs to live on in retirement?