Buying an investment property requires a lot of research and mistakes are common – and costly! The more you know, the less money you’ll waste and the less stress you’ll suffer.
Here’s a list of the common mistakes we’ve seen investors make.
Not having a strong retirement plan (or other plan!)
Investors buy properties for many reasons, including:
- to set themselves up in retirement and live off the property income
- to give the kids a head start in real estate
- to buy, renovate and hold or ‘flip’
- to subdivide or develop
- because it looks like good value
- because they feel like it (an impulsive buy).
Many investors buy property without an end in mind. According to the Australian Bureau of Statistics, more than 75% of investors have only one property. This is not enough to retire on. Before you buy an investment property, make sure you have a plan.
Selling not holding
When investors buy and sell , they pay significant costs, including stamp duty, conveyancing, agent commissions, advertising and capital gains tax.
Often, after an investor sells, they look at what they’ve paid in total and wonder why they didn’t hold, refinance and buy another property.
Not understanding value
Taking a longer view and having a plan gives an investor time to research properties, choose the right one and make an informed decision on price.
Take your time to understand current values. Ask your agent for a list of properties with values comparable to the property they’re selling. Drive past them to compare prices.
Not understanding the area/suburb
All suburbs have good and bad areas within them. Again, talk to agents but also a good property manager. Find out if it would be easy to rent out a property if you bought in a particular area.
Sometimes buying even one street over can put you in a different school catchment area and make your property easier to rent.
Getting a rent appraisal from a salesperson
Real estate salespeople are, by definition, positive and optimistic people. Therefore, they often quote a rental figure for a property that is higher than a property manager would quote.
Always ask a property manager or BDM to provide a quote for rent and ensure it’s in writing.
Not understanding what tenants want
When two rental properties are almost identical, a prospective tenant will choose the one with:
- air conditioning
- a lock-up garage
- better security.
Sometimes properties sit vacant for a long time because investors won’t provide these elements that are important to tenants. Always consider these when buying a property.
Not getting the necessary reports
When investors buy properties, they often skip necessary reports to save money. However, they end up paying more in the long run to fix problems that these reports could’ve picked up early.
When you make an offer on an investment property, always include a request for a:
- building report certifying the structural condition of the property by a qualified builder/inspector
- termite and timber clearance report
- report that all electrical, gas and plumbing are in good working order.
You will need to pay for these reports, but they’ll come with a warranty in case you find a problem later.
Misjudging early cashflow
Often, the first month’s income from a property will be lost to agent leasing costs, property condition reports, and advertising and marketing.
If you need to pay your first mortgage payment and suddenly realise you have no rental income, you’re starting off stressed.
Always retain two months of mortgage payments in your bank account as a buffer for unexpected expenditures. Sometimes it’s better to borrow a little more than to be constantly ‘hand to mouth’ with cashflow.
Some investors get interest-only loans to reduce their monthly payments. Others choose principal-and-interest loans to slowly reduce the principal (initial loan amount).
When you buy an investment property, study the interest rates and ensure you’re getting a competitive rate.
Also look at the loan term. Try to borrow long and pay off short; for example, get a 15 or 20 year loan rather than a 5 or 10 year loan.
There is no tax deduction for principal repayments on investment loans – only the interest component. So you don’t want to pay large principal repayments if you don’t have to.
Not choosing a managing agent (or choosing the wrong one)
For a stress-free rental experience – or less stressful – you should appoint a good managing agent. They’re worth their weight in gold. (Obviously, we recommend Bourkes!)
A managing agent will find prospective tenants through open homes and showings. They will then:
- conduct credit checks on tenants
- choose the best tenant application
- produce lease documentation
- take four weeks bond and two weeks rent upfront.
After that, they will:
- conduct property inspections
- chase late rent
- organise the exit of existing tenants and entry of new ones.
As the landlord, you just have to sit back and receive regular income and communications.
Read more in our article about questions to ask your property manager.
Buying too many or not enough properties
There is a common expression: ‘A bow too tensely strung is easily broken’. In our industry, this means some investors buy too many or overly expensive properties, and are always financially stressed as a result.
Other investors buy just one property hoping to retire wealthy with real estate – but they need to buy more properties to achieve this.
To find the right balance of wealth and lifestyle for you, talk to everyone in your team – your real estate agent, accountant/financial advisor and property manager.
Buying the wrong type of property
There are many property types, including houses, townhouses and apartments. Each property type has its own pros and cons, so you should choose your property type based on what you want to achieve.
If you want capital gain, you should look at houses, land or development sites. However, these traditionally rent for less than similarly valued strata title property.
If rental income is more important to you than capital growth, strata title property is probably a better fit. Just watch out for properties with high strata levies!
If tax deductibility is a priority, you should consider new or near-new properties, as the chattels and building can be depreciated against rental income.
Not spending when you should
Sometimes tenants will stay in a property for years if you approve their request for an air conditioner or minor repairs.
Unfortunately, some investors are ‘penny wise and pound foolish’. They won’t spend the money, so the tenant moves out and the property remains vacant until the investor finally spends the money.
Always consult with your managing agent about the best areas to spend money, as they are your partner in this process.
Do you have more questions about investing in property or need assistance with your purchase? Contact Alan Bourke or anyone from Bourkes on (08) 9474 2000.