Did you know that almost half of those who invest in property end up selling within the first five years? And most of those who stay in the market never end up buying their second investment property. However, some investors do very well.
To help you succeed in property investing, here are the 13 biggest mistakes that property investors make, so you can avoid falling into the same trap.
- Buying a property close to home (so they can drive past)
- Self-managing tenants
- Buying at auction
- Buying older properties with no potential to add real value
- Buying based on the look or feel of a place
- Selling to realise a profit (when they should refinance and save the tax)
- Paying off debt (when they should create a redraw facility)
- Waiting for a downturn in the market
- Waiting for the deal of a lifetime
- Not having the correct ownership structures in place
- Not allowing for all purchase costs (stamp duty, mortgage registration, LMI)
- Selling property to finance lifestyle
Buying a property close to home (so they can drive past)
As convenient as this sounds, buying a property close to home might not be as fruitful as buying a property in a booming area. There are many factors we look at when choosing an investment property, such as, population growth, jobs, demographics, and amenities. Choosing a property in an ideal location is crucial, as this impacts the demand and overall cashflow of your investment.
An investment property is like another business, so you want to give it the best opportunity to generate passive cash flow. Even if this is in another state, or far from your home, you can always count on property managers monitoring and providing you updates.
2. Self-managing tenants
Self-managing tenants can be a tricky task especially if disagreements arise. There are numerous potential problems when landlords self-managing their tenants, such as attending the property unannounced or becoming friends with tenants. Having a property manager takes the pressure off self-managing tenants and acts as the middleman between landlord and tenants.
At Silvertail Property Management, we have up to date knowledge of laws and legislations regarding residential tenancies, maintain a professional relationship with all tenants, ensure rent and invoices are paid on time, and more. For more benefits of what a property manager can do for you, click here.
3. Buying at auction
Buying a property at auction comes with various risks. If you make the winning bid, you immediately enter into a binding unconditional contract with no cooling off period. With limited information about the property, you might be buying into an expensive mistake.
4. Buying older properties with no potential to add real value
Buying older properties and renovating can be a great way to add value to your investment. On the flip side, some older properties require major renovations to make the property liveable. Therefore, costing a lot of money that doesn’t add any major value to the property.
5. Buying based on the look or feel of a place
Buying a property is a big financial commitment and it can be difficult to leave emotions on the sideline. When looking for an investment property, you need to consider more than the look or feel of a house. When emotions are high, judgement gets clouded, distracting you from your property goals.
Think of the property as a business, and consider factors such as the amount of yield and passive income it could generate for you. Switching to this mentality will help to leave emotions aside while making the careful decision of choosing an investment property.
Overcapitalisation is when a property is renovated beyond its resale value. Investors can get caught up in renovating and the idea of adding value to a property. Then when it comes time to sell, investors are making a loss. To avoid overcapitalising, understand the price market of your area and use this as a guide for your renovation budget.
7. Selling to realise a profit (when they should refinance and save the tax)
Investors may sell their investment property to realise a profit. This is when the investment is sold for higher than what it was purchased for. The profit an investor gains from selling their investment will incur capital gains tax.
A reason many investors choose to invest in the first place is for tax benefits. When you have unrealised profits, this profit is still in your investment. You’re not required to claim this gain as income, as this money is in the active investment.
Instead of selling to realise a profit, investors should take advantage of refinancing to save money. Refinancing your mortgage is when you take out a new mortgage loan on the current value of the property.
This new loan pays off your original loan, so you’re left paying your remaining mortgage at the lower interest rate to the lender. Overall, this saves you money on your loan repayments or even allow you to invest further.
8. Paying off debt (when they should create a redraw facility)
If your mortgage has a redraw facility, this allows you to access extra payments you have made on top of your minimum monthly repayments. Each lender has different terms and conditions around redraw facility so double check what yours allows.
Having the ability to access this extra money is great, as investors can use this as a deposit for another property. Not having access to redraw means all extra money will go towards paying off your mortgage, making it harder to fund new investment opportunities.
9. Waiting for a downturn in the market
Some investors wait and wait until there is a downturn in the market. However, property prices have historically increased over time instead of decreased, so unfortunately they end up paying more for the same type of property down the track.
10. Waiting for the deal of a lifetime
Like waiting for a downturn in the market, a mistake many investors make is waiting for the deal of a lifetime. There is no “perfect time to buy”. Look for a property that is suitable for what you can afford and aligns with your property goals.
11. Not having the correct ownership structures in place
Many investors don’t consult the right professionals prior to purchasing an investment property. This commonly leads to investors purchasing in the wrong entity. The consequences of this are added costs and less benefits down the track.
For example, a husband and wife are purchasing a property together, and the wife is about to have a baby and stop working. As the wife won’t be working during this time, she isn’t going to receive any tax benefits in the future, therefore it would be beneficial to put majority ownership in the husbands name who will be claiming most of the tax benefits as he we continue working full time after the baby arrives.
12. Not allowing for all purchase costs (stamp duty, mortgage registration, LMI)
There are many purchase costs when it comes to buying an investment property. This includes stamp duty (different in each state), solicitor/conveyancer fees, pest and building reports, buyer’s agent fee, LMI, mortgage registration fee and home loan fees.
13. Selling property to finance lifestyle
Selling an investment property to finance lifestyle only provides short term gain. Keeping an investment property for a long period will generate a steady passive income, and provide more opportunities than an investor that sells.
If you would like further advice about property investing, reach out to our team to have an obligation free chat via calling 1300 846 956 or emailing email@example.com