So to help you avoid some of the common pitfalls, let’s look at a few of the strategies that could make your investment more of a money pit than a profit-spinner…
1. Putting all your eggs in one industry basket
It’s common for investors to be lured in to a particular investment location by the promise of rapid industry growth in that area.
Mining towns are a perfect example: they become investment hotspots for those with the hope of achieving quick high returns – which may be the case for some who get their timing right.
But what happens when the industry slows down?
Suddenly, the driving force behind the area has disappeared and likely a good percentage of its population with it!
As a result these “shallow” markets are risky, because ultimately they’re based on one or a small group of industries.
It’s always a better idea to invest in an area with a diverse range of industries driving its economy, preferably in a capital city with a large and growing population base, to reduce your risk and improve your property performance results.
2. Ineffective joint ventures
Joint ventures in investment properties can be brilliant – but they can also bomb.
For new investors who need a little help to getting a foot on the property ladder, teaming up with other like-minded investors can be just the boost they need. However, signing up for something as complex as investing in a property with others is no small undertaking, and needs to be stepped into with caution and good planning.
Firstly, all parties in the joint venture need to set and be aware of the common goals, time frames and risk tolerances. This can avoid conflict down the track.
There also needs to be clearly defined and allocated tasks for each party. Everyone needs to know who is responsible for each process of the investment, such as all the facets of organising the finances, council approvals, insurances, etc.
Miscommunication and missed deadlines are common if the work isn’t allocated effectively.
Make sure you work with a solicitor experienced in the area of joint venture contracts and draw up the relevant correct legal documents.
It’s easy, especially when joining up with family or friends, to be blasé about the legal side of sharing a property investment but it’s crucial that you do everything by the book, so that everyone is clear about the expectations and goals of the property.
This protects you and your relationships. After all, joint ventures are a business project and need to be treated as one. They require a little more work and planning than a bunch of friends chipping in for a group present!
3. Buying for the beach lifestyle
Wouldn’t we all love to live by the seaside?
While the prospect of a coastal lifestyle is appealing, in the property market world it often just doesn’t hold up in terms of long-term growth performance.
This is because most coastal areas are generally tourism and retirement communities with no multi-pronged commerce industries driving the local market.
When the economy turns south, properties are often available in abundance, which drives down rental yields and stagnates growth. Of course this isn’t a hard-and-fast rule for all coastal properties, but I’ve seen many inexperienced investors who have been caught out and wound up stuck with a slow-performing asset for years.
I always recommend doing very extensive research before buying in coastal areas.
In general inner and middle ring metropolitan suburbs tend to show more solid growth over the long term.
4. Caught out by body corp
The house vs unit debate has been ping-ponging around for years, and one of the clear downsides to purchasing a unit or apartment can never be refuted: it is that you will have to pay body corporate fees.
These cover the shared expenses of the block of units, such as building insurances, building and grounds maintenance, electricity and on-site amenities like pools and gyms.
They are a necessary evil of multi-dwelling complexes and unfortunately, body corporate fees never go away – if anything, they tend to increase as the building ages and requires more maintenance.
I’m not concerned about paying Body Corporate fees for insurance, maintenance and general repairs. You’d have to pay these fees if you owned a house with no other common owners.
However steer clear of complexes that have extra amenities like communal swimming pools, gyms and elevators. They may add a significant amount to the ongoing expense of the property over time.
5. Letting your heart rule your head
Buying a home for yourself is an emotionally driven experience. The problem is when buying an investment property, even though it’s for other people to live in, we’re not always immune to the same emotions.
Property investment should be a calculated strategy based on numbers and risk – that means laying aside the ‘oohs’ and ‘aahs’ of the dwelling itself and making sure it stacks up as a worthy investment that will create wealth for you long-term.
Too many inexperienced investors want to buy the type of property they can imagine themselves living in. Other’s buy a property close to where they live (because they’re familiar with the area), near where they want to holiday or where they want to retire. These are all emotional reasons for buying – not business reasons.
It’s just not good business sense to let your emotions dictate your purchases. Let the numbers and the research do the talking.
6. Jumping in feet first without checking the depth
One of the basic rules for all investors is do careful due diligence.
Research the market, the suburb, the street the property and the price.
Once you’ve found a property you’re interested in, it’s also worth researching the motivation of the vendor – why is he selling?
Most research data tells me what’s happened in the past, but what I’m looking for are leading indicators. I want potential predictors of what will happen in the future.
So apart from researching suburbs and properties, I pay attention to things like:
- Population growth – which will affect demand.
- Consumer confidence.
- Finance approvals trends.
- Employment growth.
If you haven’t got the time, experience or ability to undertake this type of extensive study consider using a Buyer’s Agent to help you.
7. Buying in high population growth areas
An easy mistake to make is buying in an area where there is strong population growth and lot’s of new homes being built, thinking this will translate into capital growth.
This isn’t necessarily the case.
Usually there is adequate land and building supply in these new outer suburbs and because of this, there are not the demand drivers pushing up prices.
Also the demographics in these suburbs means people will be more interest rate sensitive – again making them poor areas to invest.
What you need to look for is a combination of strong economics and industry, population growth and limited supply of land available for development.
The bottom line:
While I’ve covered some of the pitfalls that can cause investors to lose money through property, this list is by no means exhaustive.
Remember to always seek expert advice before undertaking property investment as it’s important to get your foundations right. Take it from me: a little preparation and knowledge upfront can save you from a huge headache later on.
Kate Forbes is a Property Strategist at Metropole Property Strategists in Melbourne. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
She is a regular commentator for Michael Yardney’s Property Update
She is a regular commentator for Michael Yardney’s Property Update
Read more Expert Advice from Kate here!
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.