Mistakes buyers make with their first investment property
Your first property investment is the most important one. Get it right and it could possibly turn out to be your springboard to building a substantial property portfolio. Get it wrong and you’ll probably never move past your first investment property.
Around half of all those who get into real estate investing sell up in the first five years, and less than 10% of those who stay in the game end up owning more than two investment properties.
Let’s look at seven of the most common mistakes made by first-time investors so you can avoid them.
1. Wrong investment strategy
In my mind, residential property is a high-growth, relatively low-yield investment, yet many beginners buy real estate for cash flow. While cash flow is important to keep you in the game, it’s really the capital growth of your properties that will get you out of the rat race.
What many beginners don’t realise is that when they eventually retire, the vast majority of their asset base will be from the tax-free capital growth of their properties, not from the money they’ve saved or the rent they’ve received along the way.
2. Location
Since 80% or so of your property’s performance will depend on its location, buying in the right location is critical.
The long-term growth prospects of your property will require multiple growth drivers, and these are most likely to occur in the inner- and middle ring suburbs of our state or territory capital cities. Yet many beginning investors try to fight this trend by looking for the next hotspot.
Instead, they should be researching areas where residents have high disposable income so they can afford to buy properties, such as areas that are gentrifying.
Sure, some investors have made money buying in outer suburbs or in regional Australia. But if you’re after the certainty of long-term capital growth, metro is the way to go.
Most of Australia’s future economic growth, population growth and wages growth will occur in the economic powerhouses of our eastern state capital cities. Looking elsewhere is a challenge best avoided by beginners.
3. Wrong property
It’s also important to own the right property in the best location – one with an element of scarcity and one that will appeal to affluent owner-occupiers who will be keen to buy similar properties to yours, pushing up prices.
4. Wrong finance structure
Property investment is a game of finance with some houses thrown in the middle. I’ve probably seen more investors get out of the game because they had incorrect finance and couldn’t hold on to their properties than from any other mistake.
While many beginners believe that finance is all about interest rates or fees, there’s much more to it than that.
Strategic investors don’t just use finance to buy properties. They use finance to buy themselves time to ride the ups and downs of the property cycle by having a rainy-day buffer in an offset account.
Currently, when trying to refinance many property owners are being told that they don’t have any borrowing power, even with strong equity and good income. This is because their bank lender or broker structured their loan incorrectly at the start.
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5. Underestimating cost of owning property
Don’t blindly believe that the rental rate the selling agent promises is the one you’ll get. Many salespeople overestimate rental values, so it’s better to check with a local property manager who specialises in the location you’re considering.
And remember to budget for all the costs that property investors experience. Things like property management fees, insurance, land tax, council rates, repairs and maintenance all add up to bite into your cash flow.
6. Letting your emotions drive your decisions
We’re all human, and getting excited or scared about big financial decisions is normal. This leads you to do things like choosing a property you’ve fallen in love with or one you feel you can live in or overpay for because of FOMO (fear of missing out).
And when the market favours the buyers, FOBE (fear of buying early) holds many novice investors back. Emotions run high because of all the misinformed commentary about property market being pumped out by the media, in the good times and the bad.
To be a successful property investor, you must learn not to make big financial decisions based on emotion rather on experience.
7. Not learning from your mistakes
We all make mistakes, but possibly the biggest one you can make is not learning from your mistakes. That’s the way you grow and improve.
In fact, one of the worst things that can happen to a novice investor is to get it right first-time round – this tends to make them think that they have got it all figured out, but the market will find a way of humbling them sooner or later.
The bottom-line
Investing in residential real estate is a great way to take control of your financial future, but it’s a long journey with traps, potholes and landmines. So be realistic, be aware of the risks and be prepared for things to go wrong along the way.
But don’t be put off by these potential risks, because not investing in your financial future is probably a much bigger risk.
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This article via Property Update does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.