4 of the biggest mistakes people make when buying property
Property expert Chris Gray gives us the lowdown on what not to do when you're on the hunt for a house or apartment.
Whether you're buying a dream home or an investment property, there's a chance that you could make the same mistakes that other property buyers have been making for decades. But the good news is it doesn't need to be that way.
While a property purchase can invoke some big feelings, it's important to sit down and think logically about your decision and try to take as much of the emotion out of the equation as possible.
Full disclosure, I'm an ex-accountant, so being unemotional is probably easier for me, but it's something you can learn to do too.
1. Buying something pretty
Most people are emotional when they buy property. They typically want to buy something they could see themselves living in, even if it is for an investment. Sales agents are great at selling the dream and the better a property is marketed and styled, the more it could be hiding major deficiencies. I've had a good friend fall so much in love with the décor of a unit in Sydney's Eastern Beaches, they completely ignored the fact that it had no parking – which would have been an absolute nightmare in the heat of summer. The agents crammed everyone into the unit for the auction, the atmosphere was electric and that is exactly what you don't want.
If you want a more stable and solid investment, speak to the property managers and sales agents about what buyers and renters want in the area and what they avoid. First play the hand of a buyer, then pretend you're a seller and see if the advice changes. Sticking around the median price of an area will increase your chances of always finding a tenant or a buyer as it means the majority of people can afford the price point.
Buying something pretty can include buying something for financial reasons such as rental income. While having a high rental yield which covers your mortgage and other costs at the time can seem really attractive, if it doesn't grow in value, will you be able to retire off that extra $50 a week? High rental yield areas are often further out of town and could be in one of the industry towns that are reliant on tourism or mining. This seems fine at the time but you might just find your property halving in value if the heat goes out of the location or the industry slows down, just at a time that you don't need it.
I'd much rather buy an ugly duckling in the right location that ticks all the boxes of things like parking and double bedrooms, than paying the same price for the beautiful property that's further down the road. Remember you can always renovate the property at a later date, but you can't move a beautiful property to improve its location.
2. Timing the market
Most property buyers try and time the market perfectly so they get:
- High capital growth
- High rental yields
- Low interest rates
- Easy to borrow money from the bank
- Easy to find property
I've been investing for over 25 years and I've never seen a time when you get all five and so my golden rule is to buy when: 1. I've got the deposit, 2. I can get a mortgage and 3. When I've got enough cash buffer to hold on for the next few years.
3. Paying the wrong price
I'm constantly surprised at how many self proclaimed property experts are out there. There seems to be one in just about every household, especially when it comes to knowing how much to pay for a property. Even if they haven't been in the market or bought anything for years, these "experts" seem to know what a property is worth.
Methods include basing the price on what the agent (who works for the vendor) told them, what a free or $50 online app is telling them (the algorithm hasn't done a personal inspection), what they overheard someone else saying, or just putting their thumb in the air and applying a set discount or premium. And they do this in about two minutes!
My team and I have been buying the same types of property in the same areas for over 20 years and have bought literally hundreds of them. Even though we think we know the price, we know there can be some emotion in there and so we'll pay an independent valuer $660+ each time we even consider putting an offer in. Even though the valuer knows the areas inside out, he takes 2-3 hours to inspect it, prepare the comparable sales, do strata checks to confirm the actual sizes and then prepare a calculation.
The only way to really know what a property is worth is to have been inside lots of comparables that have sold above and below the property you're targeting and to do detailed calculations based on price and yield.
Paying the wrong price can set you back years or even decades as it means you're not able to extract the equity and keep repeating as quick as you might otherwise be able. Compounding is the eighth wonder of the world and the real key to wealth creation. You've got to buy the right property at the right price.
4. Not taking action
There's always something that will stop you getting into the market. Recently it's been an election. Last year it was the Royal Banking Commission and serviceability issues. Before that it was because we were in a boom. Next it could be tax changes. Then it will be rising interest rates. After that it could be your job security or the kids going off to private school.
Many people will still argue that property is expensive and yes, it certainly is. But do you really think that the history of the last few hundred years will suddenly reverse and the long-term trend will be down? Whatever you bought 10 or 20 years ago will almost have definitely made money. While property is always expensive today, it's nearly always cheap when you're looking back on today, many years later. So even if you do continue to make the above errors, ensure you just do something, as often time heals most mistakes.
Chris Gray is the CEO of Your Empire and the host of "Your Property Empire" on Sky News Business. Chris is also a qualified accountant, buyers' agent and mortgage broker.
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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