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Common Mistakes to Avoid When Investing in Property
Investing in property is a great way to generate wealth and security for your future. However, it can also be a risky endeavor if you’re not fully prepared. All investments come with a degree of risk, but if you take the right steps along the way, you can considerably improve your chances of success.
There’s plenty of pitfalls along the way, so to help you out we’ve put together a handy guide for all investors. Here’s some of the common mistakes people make when investing in property.
Buying the first property you see
This mistake can happen to anybody, but it’s particularly dangerous for first time investors. Once you’ve made the decision to purchase an investment property, you’re obviously excited to get the ball rolling. However, this enthusiasm can sometimes lead to hasty, poorly researched decisions.
Now, there’s no reason the first property you see won’t be an incredible opportunity for future wealth creation. However, enthusiasm often causes you to overlook or disregard certain factors that shouldn’t be ignored. If you do opt to purchase the first property that comes along, make sure you’ve done all your research and considered every potential issue before signing on the dotted line.
Not researching properties thoroughly
This mistake often flows from the first one. Whether it’s exuberance or just a lack of commitment to due diligence, not doing your research can have terrible consequences. There are of course some basic things to consider of a financial nature, such as being certain the expected rental yield meets your needs. You also want to consider the potential for future capital growth.
However, those are the non-negotiable factors you need to consider. Others that often get forgotten are things like researching the local area. Are there schools nearby? Is it close to public transport? What’s the socio-economic demographic like? Is the area still growing or in decline? In short, you should leave no stone unturned when researching properties.
Exceeding your budget, or not even having a budget
Firstly, let’s address the issue of having a budget. Needless to say, this is essential. You need to know how much you can borrow, and how much your repayments will be. This determines the type of rental yield you need. But it’s not just the mortgage payments. You need to budget for everything. Property management fees, council rates, repairs or renovations, coverage for down-time if you have a break in tenancy.
Your budget should inform your maximum purchase price. So, when you’re in negotiations or an auction setting, ensure you stick to your budget and avoid financial problems down the track.
Buying in declining areas
Again, this point highlights the importance of research. Generally, an area can be classified as ‘developing’ or ‘declining’. Ideally, you want to buy in developing areas because it increases the chance of your property’s value increasing. This is called capital growth. Characteristics of a developing area might be other new subdivisions being built, thriving shops, and any number of planned developments such as business complexes or new schools.
Declining areas, however, will usually have older homes, very little development activity and a trend of rent and house prices decreasing rather than rising.
Letting emotion cloud your decisions
One of the biggest traps for property investors is letting their emotions control their decisions. While you may think it’s easy to separate an investment from an emotional purchase, the reality is quite different. Some people tend to buy investment properties in their home town because they have fond memories. Or even in an area they feel they might like to return to one day. If it’s in the back of your mind that you need an investment property to suit your own tastes for a future move, you’re not thinking long-term.
Always be firm in your mind that this is purely an investment, and all decisions should be made based on finances, research and robust data. It’s the one time in life that a significant purchase doesn’t need to be something you personally love.
Not saving enough for a deposit
It may sound like basic finances, but many people make the mistake of not saving enough for a deposit. Firstly, if you don’t have enough you may be subject to paying mortgage lender’s insurance. When purchasing a home for yourself, this often isn’t a big deal because you expect to be paying your mortgage for a number of years, even decades. However, in an investment situation, you’re already behind the 8-ball if you have to pay costs like that.
Additionally, the higher your deposit, the less you need to borrow. Over the life of a mortgage, this could save you thousands and cut years off your liability. Ultimately, that means you end up in a pure profit position more quickly when your mortgage is paid.
Taking a mortgage that’s too high
Again, we understand that mortgages are usually a necessarily evil when purchasing an investment property. But that doesn’t mean you should pay more than you have to, and certainly not more than you can afford. It can be tempting to allow yourself a few thousand more on the purchase price if a bank has agreed to lend you the money. However, just because a bank will lend you a certain amount, you may not be comfortable with the monthly repayment amount.
Also, when considering a top mortgage limit for yourself, consider fluctuations of interest rates, especially if you choose a variable rate. Your monthly repayments should be something you can easily manage, not something you have to scrape for. Interest rates fluctuate all the time, so if you buy while rates are low, be aware that when the variable rate goes up, so does your monthly repayment.
Not seeking financial advice first
Finally, we can’t stress enough the importance of seeking financial advice. Remember that most people involved in the sale of an investment property have a certain motivation to make you buy. Agents want a quick sale for their commission, so they will naturally spruik the ‘great opportunity’ in front of you. But the fact is, they’re not financial experts.
As part of your research process, consult a financial advisor to help assess your position and advise accordingly on your property investment strategy.