The 7 deadly sins of first-time investors

The concept of the ‘Seven Deadly Sins’ was historically popularised in Dante Alighieri’s Divine Comedy and more recently in the Hollywood movie Seven, sometimes styled Se7en.

This concept of the seven deadly sins can liberally be applied to some of the many mistakes first-time investors make when buying an investment property – mistakes that can lead to financial turmoil.

The sad fact is many first-time investors never buy more than one investment property, because they make simple mistakes from the very start.

These mistakes, such as failing to undertake enough research, selecting the wrong home loan or not obtaining a tax depreciation schedule, can make the difference between success and failure for first-time investors.

Avoiding these simple errors means novices can build a successful property portfolio and create long-term personal wealth.

Here are seven of the most common mistakes made by first-time investors:

1. Making an emotional decision when buying an investment property. Buying an investment property they would like to live in without thoroughly looking at capital growth and rental return potential. Research is critical when buying an investment property. Most real estate institutes throughout Australia provide free online information about the long-term performance of individual suburbs in terms of capital growth which is a good resource.

2. Deciding to buy an investment property close to their owner-occupier home rather than looking at opportunities throughout Australia. That could mean that they achieve below average capital growth rates and miss out on potential property hot spots in other locations.

3. Selecting a property based upon the advice of friends or family rather than seeking independent information. It is important to seek out people who own several investment properties and ask them how they managed to build their portfolio. They can provide very important tips on how to avoid simple traps and pitfalls when buying investment properties.

4. Failing to obtain a tax depreciation schedule for the property. The tax benefits derived by a depreciation schedule can be as high as 60 per cent of the rental income and this additional cash flow can help the investor buy additional properties.

5. Not undertaking a full assessment of the true cost of buying and holding the property. For example, if the property is an apartment, there are additional cost issues compared with buying a standalone house, such as strata fees. In addition, if the property is old, it many incur higher maintenance costs.

6. Selecting the wrong home loan That is, principal and interest loans that are typical for an owner-occupier home. Instead, first-time investors should focus on interest-only loans, which will help increase cash flow.

7. Buying a property in a location which is not attractive to tenants Such as not close to amenities like shops or public transport.

Investors can also buy a property in an area where there is an oversupply of rental properties, meaning rents will be low and capital growth limited. They could also end up with a bad tenant by trying to select the tenant themselves rather than using the services of reliable property management companies.