Three mistakes property investors make
Three experts give their tips for choosing the right investment property.
- Making an emotional purchase: Chris Gray, YourEmpire
The more an investor tries to make money quickly, the more likely they are to fall for the classic "emotional purchase" mistake. This occurs when investors concentrate on one or two beneficial aspects of an investment and take their focus off other important underlying factors.
Common factors that can cause investors to make an emotional purchase mistake include:
Cheaper price point. Just because an investment is cheap doesn't mean it has a better chance of growing. A cheaper price point often means an investment is located in an outer area with more supply and little demand.
Higher rent. Some properties attract higher rental yields and this could be because they are specialised investments (for example, with furnished or holiday letting located in an outer area or mining town). But chances are that such investments are only attractive to 10%-20% of the market rather than 80% and any change in that specialised area could decrease rent to zero.
Hotspot. Even the best experts struggle to pick the highs and lows of certain suburbs with pinpoint accuracy. Beware of investing in a hotspot and ending up with a lemon that doesn't rise for a decade.
Depreciation benefit. New properties have depreciation benefits that are great for reducing your tax but not if you have to pay a premium for the property.
Mining town. Despite the warnings, many investors have lost double their fortune investing in mining towns as they failed to get out before the downturn.
To help avoid the emotional purchase mistake, I'd recommend investors get a full, independent valuation report done. This will almost guarantee you never overpay for a property and will highlight any risk. It's also very hard to go too far wrong by buying secondhand, median-priced, inner-city (just outside CBD) properties.
- Spending years looking for one big deal rather than doing lots of small successful purchases: Patrick Bright, EPS Property Search
I often speak with want-to-be investors who are looking for the perfect property deal to set them up for the future. But nothing is ever quite right so they sit on the sideline thinking their patience will pay off eventually.
Unfortunately, while they are waiting the market is inevitably rising and unless they are able to have their savings keep pace with a bullish market, which can be incredibly difficult to do when it's really on the run, they risk being priced out of the market altogether.
I call it the lotto mentality - if the lotto deal never eventuates then you're left with nothing. I advise them to forget waiting for the lotto deal as they rarely, if ever, eventuate. They are better off entering the market as soon as possible. They should focus on doing several deals over several years to build up their asset base rather than rolling the dice on one, as experience is the most expensive teacher.
So start off small. Investing in a range of deals also reduces your overall risk and allows you to make increasingly better decisions for future investments as you learn from your experiences.
My recommendation is to have a 20% deposit and be able to comfortably meet mortgage repayments if rates rise a few percentage points or if the property is vacant for any length of time. Also, you should always secure finance pre-approval so that you don't waste your time looking at properties that are outside your budget.
- Picking a lemon: Ben Kingsley, Empower Wealth
When investing in property, just as with investing in anything, you are trying to achieve a great return. In Australia there are well over 15,000 suburbs that have over 9.7 million dwellings and this figure is growing at around 160,000 new properties every year. As investors we are spoilt for choice. With so many locations and properties, you'd think many investors would be put off by the challenge of picking an outperforming property. But, interestingly, that's not the case.
In Australia we are now close to having over 2 million property investors and many more who think bricks and mortar are a sound investment. But the statistics indicate that well over half of them aren't doing a good job. In fact, what they have done is buy an underperforming property that is delivering little if any capital growth and the rental returns are being swallowed up by fees and holding costs - yes, a lemon!
So to avoid buying a lemon, you must at the very least open yourself up to markets outside your local area and maybe even your own city. Your research must be so much more than just looking at properties and believing what the real estate agent or property marketer are telling you because their views are purely for self-interest.
Locations offering great lifestyle amenities, close proximity to good employment, convenience and limited property supply are the areas that offer the best investment-grade properties to buy for a result that will outperform. If you aren't sure how to research all this, talk to an independent property investment adviser.