You’ve probably heard that your first property investment is the most important one.
Get it right and it will be the springboard to building a substantial property portfolio; but get it wrong and you’ll probably never move past your first investment property.
Remember around 50 per cent of all those who get into real estate investing sell up in the first five years and less than 10 per cent of those who stay in the game end up owning more than 2 investment properties.
With that in mind, here are seven of the most common mistakes made by first time investors:
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Mistake #1: Choosing the wrong property investment strategy
In my mind residential property is a high growth, relatively low yield investment yet many beginners buy real estate for cash flow.
While cash flow is important to keep you in the game, it’s really the capital growth of your properties that will get you out of the rat race.
What many beginners don’t realise is that when they eventually retire the vast majority of the asset base will be from the tax free capital growth of their properties, not from the money they’ve saved or the rent they’ve received along the way.
Mistake #2: Choosing the wrong location
Since around 80 per cent of your property’s performance will depend on its location, buying in the right location is critical.
The long-term growth prospects of your property will require multiple growth drivers and these are most likely to occur in the inner and middle ring suburbs of our three big capital cities. Yet many beginning investors try and fight this trend and look for the next hot spot.
Instead they should be researching areas where residents have high disposable income so they can afford to buy properties, like areas that are gentrifying.
Sure some investors have made money buying in secondary locations, outer suburbs or in regional Australia, but if you’re after the certainty of long-term capital growth, why fight the trend?
Most of Australia’s future economic growth, population growth and wages growth will occur in the economic powerhouses of our 3 big capital cities, so looking elsewhere is a challenge best avoided by beginners.
Mistake #3: Choosing the wrong property
It’s also important to own the right property in the best location.
One with an element of scarcity and one that will appeal to affluent owner occupiers who will be keen to buy similar properties to your pushing up prices.
Mistake #3: Choosing the wrong finance
Property investment is a game of finance with some houses thrown in the middle. I’ve probably seen more investors get out of the game because they had incorrect finance and couldn’t hold on to their properties than from any other mistake.
While many beginners believe that finance is all about interest rates or fees, there’s much, much more to it than that.
Strategic investors don’t only use finance to buy properties. They use finance to buy themselves time to ride through the ups and downs of the property cycle by having a rainy-day buffer in a line of credit or an offset account.
Currently many investors are realising that trying to refinance when credit dries up is very difficult, even with strong equity and good income. That’s why successful investors get their finance structures set up by proficient finance strategists long before they buy their properties.
Mistake #5: Underestimating the rent and holding costs
Don’t blindly believe the rent the selling agent says you’ll get. Many sales people overestimate rental values, so it’s better to check with a local property manager who specialises in the location you’re considering.
And remember to budget for all the costs that property investors experience. Things like property management fees, insurance, land tax, council rates, repairs and maintenance all add up to bite into your cash flow.
Mistake #6: Letting your emotions drive your decisions
We’re human and getting excited or scared about big financial decisions is normal.
We do things like choosing a property you fall in love with or one which you feel you can live in or overpay because of FOMO (Fear Of Missing Out.)
Currently FOBE (Fear Of Buying Early) is holding many beginning investors back. Their emotions are running high because of all the negative press property is currently experiencing.
Of course, successful property investors experience similar emotions, but they’ve learned not to make big financial decisions based on emotion.
Mistake #7: Not learning from your mistakes
The previous 6 mistakes are just some of the many errors I could share with you.
We all make mistakes but possibly the biggest mistake you can make is not learning from your mistakes. That’s the way we grow and improve.
In fact, one of the worst things that can happen to a beginning investor is to get it right first time round – they tend to think they’re smarter than they are, but the market finds a way of humbling them sooner or later.
The bottom line:
Investing in residential real estate is a great way to take control of your financial future, but it’s a long journey with traps, pot holes and landmines. So be realistic, aware of the risks and prepared for things to go wrong along your way.
But don’t be put off by these potential risks, because not investing in your financial future is probably a much bigger risk.
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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