We don’t expect you to know absolutely everything before you start to build your investment portfolio, but it’s a good idea to be aware of the biggest property investor mistakes you could make before diving in.
Below, we’ve listed 11 of the biggest mistakes we’ve seen in the industry – along with some helpful tips to help you avoid these misjudgements!
1. Making Decisions with Your Heart
We’ve said it before, but emotion has no place in your investment property strategy. Despite this, we still see people buying property close to home so they can drive past it every day, or buying property they like the look or feel of.
People who get emotional about potential properties inevitably make the wrong decision, choosing properties that won’t deliver in rental yields and tax benefits comparative to other opportunities.
Every investment decision you make needs to be based on your path to wealth creation. Before you even look at investment properties, you need to analyse the metrics of the areas you’re looking to invest in to learn about historical growth, vacancy rates, local employment opportunities, available public transport, and much more.
2. Self-Managing Your Tenants
It can be tempting to manage every aspect of your investment property, but little convincing should be required to remind you that tenants are not fun. By self-managing, you’ll find your time taken up with dealing with various tenant complaints and needs when you could otherwise be furthering your investment portfolio.
3. Buying Older Properties
Purchasing an older property may sound appealing, but remember investors can only claim depreciation tax deductions on property less than 40 years old. Buying older property can mean you can’t take advantage of depreciation benefits. Whereas with a brand-new property you can claim full depreciation benefits.
Not only do newer properties often experience lower vacancy rates and maintenance costs, you’ll typically reap a better profit on resell.
Cross-collateralisation is when you use two or more properties financed by one bank to secure loans with the same bank for further properties.
It’s a big mistake to have your own home loan and your other properties all under the same bank. Do this as you build your portfolio and the bank could end up holding all the cards, putting your own home at risk.
You can avoid cross-collateralisation by using the equity from your home to cover the deposit and costs of buying another property without putting the home at risk.
5. Asking Agents for Advice
It seems like a no brainer, yet it does still happen that people trust their real estate agent’s advice. But at the end of the day, the agent’s end goal is to sell certain properties.
They have certain strategies to achieve this, typically through showing you just three houses, including one that’s overpriced, one that doesn’t meet your needs, and a third they intend to sell to you. And it’s almost always the case that they aim to sell you a property close to ending its listing.
6. Failing to Have or Follow Your Investment Strategy
A property investment plan is an essential component of your investment journey. Without it, you’ll simply meander through the real estate landscape with little to no direction.
Your property investment plan [link to Investing in Real Estate: Do You Have a Business Plan? when published] should detail your short- and long-term financial goals, property goals, and strategy for mitigating risk.
Sticking to your investment strategy will also help you keep your business goals in mind, especially if you find yourself starting to make emotion-based decisions (see point one).
7. Waiting for the “Perfect” Property
To get into property investment, you actually have to buy property! Yet some people procrastinate before even buying property number one.
Caution is a good trait to have when entering the real estate market, but too much procrastination can send you into a downward spiral of inaction! Try to learn as much as possible, but acknowledge that you’re never going to know everything before you begin.
8. Chasing the Lowest Interest Rate Option
Many people think the best deal for them is the lowest interest rate on a property loan. But it’s not always that clear cut.
Getting a loan with a low interest rate doesn’t guarantee that you’ll get the cheapest loan out there – especially if you don’t check the fine details of the loan thoroughly.
Some banks limit extra payments into your loan. Others enact a minimum loan amount for you to qualify for the cheap deals. You might face break fees if you want to get out of a fixed rate before the term ends, or you may be unable to redraw additional payments.
In any case, the interest on your loan is a deductible expense for an investment property.
9. Letting Your Rent Stagnate
Many investors don’t keep up with the rental market, which moves faster than the property market. If you don’t keep up with incremental rent rises for several years, you may have to increase the payments more substantially, which won’t go down well with the tenants.
10. Not Realising You Have Lazy Equity
Lazy equity is disposable equity that’s not being used for deposits on additional investments. If you don’t stay up to date on your equity position, you could be missing out.
Make sure you know your properties’ values – and when sales results in your area are looking good, get the bank to revalue the property.
11. Signing a Contract without a Finance Clause
Never sign a contract without a “subject to finance” clause. A finance clause gives you the ability to pull out of the contract if you can’t obtain the necessary funding to purchase the property.
It also gives you the opportunity to think about the purchase and do your due diligence before making the investment concrete.
Other property investment mistakes include:
- Buying at auction – paying more than everyone else isn’t a good investment strategy!
- Overcapitalising – it’s important to stick to your budget.
- Selling to realise a profit – better to refinance to buy another property.
- Paying off your debt – better to create a redraw facility.
- Failing to get experts to review your contract – you’re unlikely to know everything to look out for yourself!
- Buying in regional or rural areas – plenty of land means there’s a surplus of supply, so there’s less pressure on pricing.
- Waiting for a downturn in the market – chances are the market will rise, not fall.
Learn more about mistakes to avoid and any other property investment tips today with our handy Property Investing Mini Guide.