Common property investment traps and how to avoid them
A lot of Australians consider property investment an easy, fast track route to wealth generation. However, the reality is not all property investors are super wealthy and as with all types of investment there are no sure fire ways to guarantee success.
What investors can do to maximise their chances for long term wealth creation through property investment is to learn from others’ mistakes and avoid falling into common investor traps like the following four.
1. Buying an investment property ‘lemon’.
Many investors make the mistake of buying any local property they can get their hands on without paying their due diligence first. Understanding the ebb and flow of the property market takes time and a lot of research.
Before committing to any property purchase, whether it’s for investment or otherwise, it’s vital to build a case as to why it’ll be a wise and profitable endeavor for your specific financial situation to avoid ending up with an investment ‘lemon’.
Complete thorough research on the suburb you intend to invest in both online and in person. Talk to locals, agents and property mangers from the area. Look at the suburb’s amenities, future projects, historical property values, local employment drivers, vacancy rates, population growth and demographics. Read books on investing, go to seminars and attend town meetings. You can never learn too much about your investment prospects!
Keep in mind older properties can drain your finances through ongoing repairs and unexpected maintenance costs. New builds are a good option for a lot of investors because of the peace of mind that comes with a builder’s warranty and they allow you to claim maximum tax depreciation benefits.
2. Hanging out for the perfect deal.
There’s a category of first time property investors that tend to procrastinate, hold out for the perfect deal and as a result never end up getting their investment portfolio off the ground, even after doing all their homework. They easily end up overwhelmed and overloaded with information and as a result are unable to act.
No investment comes without risk and no property will be perfect in every single way. At a certain point (we recommend setting yourself a personal deadline) you just need to take the leap and have faith in the research and advice you’ve received and get onto the investment property ladder.
Even if something doesn’t work out you’ll learn from your mistakes and move on to the next investment opportunity more experienced and savvier than before.
3. Getting emotionally involved.
Another blunder new property investors often make is buying an investment property based on what their heart tells them rather than their head. Investors can often get tunnel vision when they fall in love with a particular property or have their heart set on buying in a ‘trendy’ investment hotspot, which puts them at risk of over capitalising on the purchase price.
We’re not saying you can’t use any emotions or to walk away from a deal just because you love the home. This is just a reminder to approach property investment more like a business deal than a personal purchase, where emotion takes a backseat and decisions are based primarily on analytical research, facts and figures.
Before buying an investment property ensure you’re buying for the right reasons (i.e. the potential for wealth generation) by asking yourself:
- Is it financially viable? Will the property provide the gains and rental returns I require?
- Will its location, amenities and layout attract quality tenants?
- In the long term will it appeal to the owner-occupier market that supports ongoing property value growth?
4. Failing to seek out professional advice.
The final trap investors can often fall into is thinking that they know all there is to know about property investment and that they can do everything for themselves.
The key to being a successful property investor and mitigating its various risks is to have a team of experienced experts continuously guiding, advising and managing your investment strategy. Enlist the services of a good accountant, investment specialist, mortgage broker and property manager.
Check in with your accountant or a mortgage broker for help managing your cash flow, to ensure you can afford the property you intend to buy with contingencies (like extended vacancy periods or unforeseen maintenance costs) and to make sure you fully understand all the costs that will come with acquiring and holding multiple properties.
In most cases the cost and workload to self manage your property as a ‘hands-on’ landlord can be higher than the cost of hiring and working with a property manager. Think of the hassle and time you’ll save by hiring a property manager to advertise your property, hold inspections, manage bond payment and rent collection, produce a condition report, handle complaints and arrange building maintenance, not to mention they already know how to navigate all the ins and outs of tenancy law.
Hiring a team of experts will allow you to avoid many of the headaches of being a landlord and property investor, and give you more time to focus on the next stage of your investment strategy.
When it comes to investing in property do your homework, approach it like a business deal, don’t be afraid to seek out professional help and look before you leap (but not for too long!).
Do you have any important lessons to share with budding property investors? Please share them in the comments section below.
Happy house hunting!