First-time property investors start out with the best intentions. They know that to grow their money they need to invest it. They work hard and save up their earnings into a neat little nest egg, and buy a property nearby hoping that they will be able to sell it in 10 years for double what they paid for it. Not long after, the property is sold as it is deemed “more effort than it’s worth”. If they are lucky, it’s only a small loss.
It is interesting that even though buying an investment property is the most expensive transaction most people will ever undertake, beginners treat it as though they are purchasing a new fridge/freezer.
Through the years I’ve noticed that many new property investors make the same mistakes when searching for their first investment property – mistakes that cost them in terms of both money and time.
The following list, although by no means exhaustive, sets out a majority of those mistakes:
Mistake 1 - Not knowing the fundamentals of a budding market
Property markets don’t operate in a vacuum – they are impacted by a number of things. Unfortunately, most beginners don’t know what they are or how to find them. When you understand what drives a market you can more accurately predict which markets will perform and which won’t.
These are the six key drivers. Look for them in any market you consider investing in!
- Population – markets with growing population can often put pressure on existing supplies.
- Economics – look for a vibrant economic area with a diverse range of employers, healthy employment rate, and good incomes.
- Infrastructure – government and private industry should be investing in the local economy. They will be building roads, homes, businesses, schools and hospitals in growing areas.
- Supply/Demand – is there a large glut of property that can be released or are supplies tight? Less property means higher property values due to competition.
- Demographics – gives insight into your prospective tenants. Are
- the majority of residents retired – or nearing retirement – or are they in their prime earning age? What are the incomes and lifestyle choices? Large families on a median income will want a very different property than a single, high-income executive. All of this information can help you choose a property that will appeal to the widest number of potential tenants.
- Suburb yield – an ideal yield would be in excess of 5%, however if you purchase well, you can accept a lower percentage and force value to drive up the yield.
Mistake 2 -Not looking past their first investment property purchase
A single investment property will not give you financial freedom. Rather than focus all of your energy on buying that ‘one perfect property’, think about what you want each property to achieve. With your first property, you want to achieve capital growth as soon as possible, so that you can purchase your second property. Purchase according to the numbers, and have a clear idea of how much capital you’ll need to make your next (and subsequent) purchases.
If your first property is negatively geared, and not primed for growth, not only will it be a struggle to save for your second property but you also won’t have enough equity to buy another property for a while – if at all. The wrong first purchase can damage your property investment career. Look for properties that allow you to get a return on your deposit within six to 18 months. Using strategies such as discount and renovation can get you that much needed capital sooner (through refinancing or selling) than sitting around and waiting for the market to (hopefully) give it to you in terms of property value increases. Before committing to buying that first property – before you even scan the real estate websites – you must create a detailed plan that sets out your end goals and the steps you’ll need to take to meet them.
Mistake 3 - Buying purely on emotion
Most first-time investors will buy on emotion. They’ll forgo great investment opportunities because they wouldn’t live in the property themselves, they didn’t like the colour of the bathroom tiles, or they couldn’t imagine anyone wanting to live in a small, two-bedroom apartment on the fourth floor of a city building. Beginners should bear in mind they are investing for profit and to increase their income, not because they one day plan to live in the home.
To succeed as property investors, you must invest according to the numbers. I learned this lesson the hard way. My emotions took over when I purchased my fi rst property many years ago, as I paid full price at the height of the market. My mistake cost me $35,000 in hard earned money. I had to sell – I couldn’t afford to wait for the cycle to come round again. It’s a lesson I’ve never forgotten, so do yourself a favour and learn from my mistakes – let the numbers decide if it’s a “yes” or a “no”.
Mistake 4 - Underestimating the cost of investing
When saving for an investment property, beginner investors assume they will need just a 10% deposit to purchase a property. They work hard, pull double shifts, and scrape together $30,000 – chuffed that they have enough to begin their portfolio. These aren’t the only costs when investing. These include the following:
Lenders Mortgage Insurance
Lenders Mortgage Insurance is only applicable if you are borrowing more than 80% of your property’s value. This insurance ‘insures’ the lender if you default on your loan, and shouldn’t be confused with Mortgage Protection Insurance, which protects the buyer if they are unable to repay the loan.
Cost: Varies, dependant on the size of your loan and of your deposit. Upwards of $6,000.
Building and Pest Inspections
An important part of due diligence, Building and Pest Inspections are a must. They can save you thousands as they’ll help you to avoid properties that are structurally unsound or that have unseen termite damage.
Cost: Between $300 and $800.
Insurances: building (if you don’t have body corporate), contents, landlords and mortgage protection insurance
When purchasing a property, you will need insurance to protect yourself against further costs. While it can be expensive, it may save you several thousand more.
Cost: Can come to over $1,000 per year.
Property management costs
This will be a percentage of your weekly rent, but there are extra costs so make sure to ask each prospective property manager for a full break down of the fees they charge.
Cost: $300+ per year, as well as up to 10% of each month’s rent.
Body corporate
Is your property part of a body corporate? Most units are. There are lots of benefi ts to having a body corporate, but it can come with a hefty price tag.
Cost: A few hundred – but will vary depending on the style of building and what’s included. If you opt for all the extras (lifts, covered parking, pools, spas, gyms) you can be looking at a few thousand per annum.
Vacancies
In a perfect world, your property is never vacant – but in most cases you should prepare for a minimum of two weeks’ vacancy.
Cost: Two weeks of rent or upwards of $500
Ongoing property maintenance
Plumbing, electric, broken appliances… you can expect the unexpected with this one!
Cost: Ongoing.
Total: $16,610+
The good news is that all of the above are tax deductible, and a lot of the costs can be included in your mortgage loan. If you’re a low-income earner, however, be wary that you don’t bite off more than you can chew.
Mistake 5 - Not having the right loan structures
New investors will need a mortgage broker that is experienced with real estate investment. My best tips for your loans are:
- Make sure you have the most competitive interest rate available – even if you have to negotiate with the lender
- Don’t have all your loans with a single banking institution
- Decide whether principal & interest or interest-only mortgages are the best for your strategy
- Have a qualified mortgage broker assist you with your loan structures
Mistake 6 - No savings, budget, or buffer
Lenders want to see evidence of savings, and while each have differing requirements, the bottom line is that without some savings of your own, you may be turned down or pay higher costs. This is a problem if your deposit was a gift or inheritance. Make sure you have some of your own savings to avoid problems later!
A budget is at the core of your financial life. Without one, you’ll be lost as to what you can or cannot afford, and you’ll either forget to pay bills or end up spending more than you earn. These kinds of mistakes impact your credit rating, which can affect your ability to borrow – it may even result in higher bank fees. Plus, by having a budget, you’ll be able to save a lot more and have a realistic view of how big an investment you can make.
A lot of new investors don’t realise they need a buffer. What happens if your property is suddenly vacated, you are injured and unable to work, or unexpected costs arise? Allow for generous buffers – 3% to 5% of the property’s purchase price is a good rule. Depending on your lifestyle, you may need more or less. If you have more properties, you’ll need a larger buffer!
Mistake 7 - Skipping due diligence
Many new investors gloss over this step. Even if a magazine or property mentoring group suggests a certain area with glowing statistics, you must do your own research. There is no substitute for due diligence. If you understand the market drivers and synergies of a marketplace, you’ll know what to look for. Obtain data straight from the source (e.g. ATO, ABS, district and council websites), from local papers, property magazines and from data providers such as Herron Todd White, RPData and Residex.
Assuming you’ve narrowed down your search to a few particular suburbs, create a folder for each property you are considering. Be sure to compare the estimated return of each property; it can help to call local property managers to find out what similar properties in the area are currently renting for. Eliminate the properties that will tie up your deposit for too long.
Begin organising all of your information and placing it in a central location so that you can have a clear image of what a potential investment property can deliver. This list is by no means exhaustive, and there are some great guides out there on how to conduct your own due diligence. The more effort you put into this, the better your results will be.
Mistake 8 - Hiring the first solicitor/broker/ accountant they speak to
After all the effort of finding their first property, beginner investors just want to get the process going, so they use Google to find their solicitor/broker/ accountant, and choose the first on the list.
Not all of these professionals are made equal, and not all are familiar with the nuances involved with property investing. Execute as much due diligence finding qualified, knowledgeable advisors and providers as you do when buying an investment property. Get a break down of their fees and what their fees cover, speak to them directly to discover their level of customer service (if they miss your call and take three days to get back to you, it’s not a good sign), and check out their testimonials. Don’t just go for the cheapest either – you want value for money, not cheap, poor service.
Mistake 9 - Not getting an accountant to do their taxes
You’d be surprised by the amount of people that do their own taxes! It’s imperative for property investors to have a great tax accountant, if they want to get as much tax back as possible. Look for professionals who own properties themselves, and have experience with all of the financial and tax laws surrounding property investing.
A qualified accountant can help you with:
- Advice about buying structures
- Strategies to maintain serviceability
- Reducing tax losses and
- maximising gains
- Family asset planning and
- distributions
- Planning for future tax issues
Mistake 10 - Impatience
Property investing is not a get rich quick scheme; it requires patience, persistence and a willingness to do the hard work up front so that you can reap the benefits later. I’ve seen many individuals get burnt out after a short time investing because they failed to appreciate the long-term mindset that’s required as an investor. When we try to take shortcuts or risks, we often impair our ability to succeed and soon give up, thinking that property investing is just too hard. It takes a bit of persistence and resilience to continue investing after a poor investment choice, but many of our clients have done just that. Their tenacity to create wealth overtook any frustration or grief they experienced and pushed them to build portfolios that are delivering the returns they need to reach their goals.
Sam Saggers is CEO of Positive Real Estate Group and an active investor with several properties worth tens of millions of dollars under his belt.
This article was published in the June 2014 edition of Your Investment Property magazine. You can subscribe to the magazine here.
