If you’re a first-time investor, champing at the bit to purchase the first property in what will (hopefully!) become your wealth-building real estate portfolio, it can be a daunting task knowing where to start.
There is loads 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 take your first foray into property investment.
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They include but are not limited to:
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, so leave your own likes and dislikes at the door and focus on capital growth drivers and make sure you 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 for potential futures owners for capital growth.
Do these properties sound attractive?
3. Scrimping on the details of your finance
You’re investing in property to secure your financial future and build wealth, so it’s imperative that you go over the details of your finance 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 or add to if you wish to renovate the property?
4. You haven’t researched 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, 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 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.
Check out the data for your chosen suburb to see how the property is likely to improve in value over the next ten years, before you buy.
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 actually 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, 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. A poor (or worse, no) 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, adhere to a time tested strategy that is known, proven and trusted, before you drink the Kool-Aid.
8. You don’t have 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. You haven’t done 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. You never 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, one of Australia's leading experts in wealth creation through property and writes the Property Update blog.
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