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Property investing, like any investment strategy, should be planned and executed in a structured way so that an Investor achieves the results that they are after. Unfortunately, however, things often go wrong. Investors who are using property as a tool to build additional income or long term wealth need to be aware of the common mistakes that people make when using property as an investment tool. Here I outline eight mistakes property investors make that can cost them thousands of dollars or set them back years in their investment journey.
1. Not setting goals
It is hard to know where you are going, or how you are going to get there, unless you clearly understand the target. This is why defining your goals is so important as a property investor. You see, everyone has different needs and wants and therefore the property selections must match an investor’s end game.
For some people, cashflow is king, and they want to earn extra income now through their property portfolio. But for others, long term wealth creation is more important than short term income, so their portfolio will look very different.
Being clear at the outset in terms of what you want your property portfolio to deliver to you as an investor is so important, so that the investment strategy can be planned accordingly.
2. Failing to devise a suitable strategy
There are a number of different strategies available to a property investor and not all strategies will suit all investors. Strategies may include:
a. Long term buy and hold
b. Long term buy, renovate and hold
c. Long term buy, develop and hold
d. Short term buy, renovate and sell
e. Short term buy, develop and sell
Each of these strategies comes with a different level of risk, and creates profit in different ways, and this must be evaluated to ensure that an investor’s risk and investment goals are aligned with their investment strategy.
3. Relying on unqualified advice
Unfortunately, the property investment industry is unregulated and therefore it is full of people who are providing advice based on personal experience or underlying profit drivers that may not be in the best interest of the investor. In this industry, it really is important to understand the principle of “Caveat Emptor” or “buyer beware” because many people have lost thousands of dollars investing in the wrong property, or the wrong location based on unqualified advice.
But how do you know if the advice you are receiving can be relied upon? There is an organisation called Property Investment Professionals of Australia (PIPA) who run an accreditation course for Property Investment Advisors. The course provides a framework for Property Investment Professionals ensure those giving advice have the necessary knowledge and breadth of industry experience to provide individual property investment plans and ensures they are operating within the State and Federal regulatory requirements. Advisors should carry the symbol QPIA® next to their name if that are accredited through PIPA.
If you are dealing with a QPIA® you will have that extra peace of mind, knowing they have been externally assessed and evaluated based on their knowledge and experience.
4. Investing for a taxation or depreciation advantage
Often people invest in property for the wrong reasons, and taxation benefits or depreciation benefits should never be the driving force. The goal for investing is usually related to improving one’s position financially, however the high transaction costs associated with property mean that the strategy must align with the overall goal.
Deciding to purchase a property, based on the depreciation or taxation benefits rather than on the long-term opportunity for capital growth, is a mistake many property investors make. There really is limited benefit of getting annual taxation relief, unless the property is also growing in value. So, the overall drivers of the performance of the property in terms of capital growth and rental yield should be more important when considering where and what to buy, than obtaining a tax benefit.
5. Investing in their own backyard
Many investors feel comfortable with what they know and therefore when considering an investment property, their own neighbourhood or suburb can be where they start. But this may not be the best performing area from an investment perspective. Depending on an investor’s risk appetite, goals and strategy … property investing can take place within the same city, regional area or even interstate.
As an investor grows their portfolio, there are things to consider such as land tax and diversification which often mean looking outside of the area that one lives in is critical for success.
Remember, even if you are comfortable with your own city or region, there are always markets within markets, and local drivers of supply and demand often cause certain areas to out-perform. So, it may not be the suburb you know, and it does not necessarily have to involve an interstate purchase (which many investors are not comfortable with – especially those with a strategy to renovate or develop), but it should involve a more holistic view of the region to understand which area has the best opportunity for the future. Understanding these fundamental drivers is important to ensure the property investment is best placed for future performance.
6. Getting emotional about the property
Buying a home is different to buying a property for investment purposes. We often rely on emotional drivers when looking at a home to live in, but this should not be the case when it comes to assessing a property as a suitable investment.
Identifying location, property type and price should be non-emotive and based on research. Sure… it is important that the property appeals to a potential tenant … and it is also important to consider who the next buyer may be as well … but the final decision should not be based on how a property feels or how it makes us feel as an investor. It should be based on numbers and strategy. That’s it.
7. Not knowing how to find an investment worthy location
There is so much information available at our fingertips about property and real estate that it can be completely overwhelming to understand how to find a location that is good to invest in. There is also so much data available to us about property markets that it is difficult to decide what is relevant and what is not.
The key to finding an investment worthy location is to really understand what the underlying drivers of supply and demand are for properties within a particular region. This can include an analysis of both available land supply as well as associated dwelling approvals and commencements to get an understanding of future supply. It can also include research on population trends, economic growth, job growth and wages growth, which help us to determine what the demand for housing may be in a particular area. Once we understand where people are moving to and why, as well as how much housing there is in that area and how much is currently under construction, we get a good understanding of whether there is likely to be upward pressure on prices or the opposite.
8. Not doing enough research or due diligence
This is one of the most important aspects of property investment – research and due diligence. Of course, this partly involves understanding the location of where to buy, but it also extends to understanding the property itself including everything that you can see, but more importantly also everything that you simply cannot see through an inspection. A thorough due diligence process will not just involve a physical inspection of the property, but also a comprehensive desktop review of what may be underground, what restrictions may be placed on the property based on council zoning and overlays, what the neighbourhood is likely to look like in the future based on development in the area and what future infrastructure may impact on the property, either positively or negatively, that you need to consider before making an investment decision.
As you are most likely aware, Property Investment comes with a certain level of risk. The mistakes outlined in this article are some of the most common mistakes new property investors make when just starting out on their investment journey. Unfortunately, a bad purchase, can either cost you significantly, or set you back many years through the opportunity cost. But when you understand the risk and implement a strategy that matches your goals, you are setting yourself up for the best long-term opportunity for success. Like anything, there are experts who can assist, but if you understand the fundamentals, know what you are looking for and avoid the most common mistakes.. then investing in property can be a very powerful way to set you up for your future independence.
By Melinda Jennison
QPIA® & Managing Director – Streamline Property Buyers Brisbane