10 mistakes to avoid when you start investing in property
Property expert Michael Yardney takes us through some of the most common pitfalls faced by first-time investors – and how to steer clear of them.
If you're champing at the bit to purchase the first property in what will (hopefully) become your wealth-building real estate portfolio, knowing where to start can be a daunting task.
There is a lot of advice out there on how to go about it, but possibly even more important than the "how to" is the "what not to do".
These are the big mistakes to avoid at all costs when you make your first foray into property investment.
Podcast: Listen to Michael Yardney talk about how to avoid property investing mistakes
1. Buying with your heart, not your head
Buying an investment is not the same as buying your "forever home".
You don't need to love the property, you just need to make sure the numbers and figures stack up.
Leave your own likes and dislikes at the door and focus on capital growth drivers, including location, property market growth in that area and the average rental yields for similar properties.
So, avoid your primal urges. The goal should be to buy an investment-grade property in a location primed for strong, long-term capital growth.
2. Not knowing your target market
Make sure you buy the right property for its location.
Looking at a family home with no off-street parking and a badly-secured yard? How about an executive-style apartment that's miles from the train station?
Put yourself in the shoes of your future tenants – and potential future owners – for capital growth. Do these properties sound attractive?
3. Scrimping on the details of your finance
When you're investing in property to secure your financial future and build wealth, it's imperative that you go over the details of your finances with a fine-toothed comb.
Do you have a financial buffer – some money set aside for a rainy day?
Are the loan terms attractive? Is the interest rate competitive? What are the extra costs?
Is it a flexible loan, which will allow you to redraw from or add to the loan if you wish to renovate the property?
4. Not researching the location
Sure, the property itself needs to be desirable to owner-occupiers and tenants, but buying in the right location is the most important factor.
Remember this: location does 80% of the heavy lifting of your investment property's capital growth.
Rental yields will only get you so far – to build real wealth, you need to chase capital growth and not all locations are created equally.
While getting a foothold in the market in a cheaper, outer suburb can be tempting, price growth there is likely to take much longer (and be more uncertain) than in a middle-ring or inner-city locale.
So before you buy, check out data for your chosen suburb to see how the property is likely to improve in value over the next 10 years.
This could involve looking at free suburb data on Domain and Realestate.com.au, getting reports through a service such as CoreLogic or Residex, or speaking to a property investment strategist, among other things.
5. Misjudging the rental market
If you're looking to buy an investment property and you can't quote vacancy rates and median rents verbatim, then you need to go back to the drawing board.
You should have a thorough understanding of the rental price you're likely to achieve and how this compares to your loan repayments long before you're signing a contract of sale. Otherwise, you could find yourself putting your hand in your own pocket to fund the shortfall each month.
6. Not accounting for maintenance and repairs
This is a common mistake many investors make – and it can ruin them.
Do you have any idea how much repairs and maintenance are likely to cost on the property? How old is the hot water service? Is there mould, a leaky roof or dodgy wiring?
Yes, you'll have insurance to cover the big things and accidents, but that doesn't cover a kitchen mixer tap slowly dislodging itself with normal use and leaking into the cupboard below, rotting it away.
As an investor, you must plan for all these worst-case scenarios with even greater care than when you own your own home as the lease will likely stipulate that such issues must be repaired in a timely manner.
7. Having a poor investing strategy
Maybe you took advice from a well-meaning relative, or read on a blog somewhere about the next big thing in real estate, but it turns out these plans just don't suit your bigger picture.
Remember, your investment strategy is just that – YOURS.
So, stick to your guns, don't lose sight of your short- and long-term goals and adhere to a time-tested strategy that is known, proven and trusted before you drink the Kool-Aid.
8. Struggling to find reliable, affordable contractors
This is where the experienced investors will have the advantage over you every time.
They've got the best builders, plumbers and tree-loppers on speed dial, and because they own several properties and channel lots of work their way, these contractors give them great rates and speedy service.
Word of mouth tends to be the best way to find good tradies, although online reviews can be helpful too. Once you've found them, hang on tight and treat them right.
On the other hand, if you employ a proficient property manager you will have access to all their great contacts.
9. Not doing your due diligence
Don't be so eager that you forget to have pest and building inspections conducted, an independent valuation done and your insurance and finance nailed.
Sit down, make a detailed list and be sure not to skip a single thing because it could really come back to bite you.
10. Not wanting to learn
Your first investment is a great learning opportunity, so use it wisely. Don't make the same mistakes on the next property you buy.
Fine-tune your strategy, learn what not to do and implement those contingency measures that you didn't realise you needed last time – and you'll be well on your way to building a profitable property portfolio that sets you up for financial freedom.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author and one of Australia's leading experts in wealth creation through property, and he writes the Property Update blog.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder have taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
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