Expert Advice with Michael Yardney.
You've probably heard that your first property investment is the most important one. Get it right and it will be the 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.
Mistake # 1: Choosing the 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.
Mistake # 2: Wrong 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 middlering suburbs of our three big capital cities. Yet many beginning investors try to fi ght 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 secondary locations, outer suburbs or in regional Australia. But if you’re after the certainty of long-term capital growth, why fight the trend?
Most of Australia’s future economic growth, population growth and wages growth will occur in the economic powerhouses of our three big capital cities. Looking elsewhere is a challenge best avoided by beginners.
Mistake #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.
Mistake #4: Wrong financing
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 fi nance 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 fi nance to buy properties. They use fi nance to buy themselves time to ride the ups and downs of the property cycle by having a rainy-day buffer in a line of credit or an offset account.
Currently, many investors are realising that trying to refinance when credit dries up is very difficult, even with strong equity and good income. That’s why successful investors get their fi nance structures set up by proficient finance strategists long before they buy their properties.
Mistake #5: Underestimating the rent and holding costs
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.
Mistake #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).
Currently, FOBE (fear of buying early) is holding many beginning investors back. Their emotions are running high because of all the negative press property is currently experiencing.
Successful property investors experience similar emotions, of course, but they’ve learned not to make big financial decisions based on emotion.
Mistake #7: Not learning from your mistakes
The previous six mistakes are just some of the many errors I could share with you. 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 beginning investor is to get it right first time round – this tends to make you think you’re smarter than you are, but the market will find a way of humbling you 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.
Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.