Property investment is all about opportunity: buying the right property in the right location for the right price. In some circumstances, success is determined by factors beyond the investor’s control. A major employer may pull out of an area, interest rates may rise, tenants may lose interest in apartment living.
Most investors, however, do not lose money because the market suddenly changes direction; they lose out because they fail to seize the opportunities presented by property investment.
1. Failing to do research
Knowing the market is the first step towards being able to identify opportunities.
Thorough research takes a lot of the speculation out of property investment, director of Right Property Group Victor Kumar says.
“Research is the absolute most important thing. There is a degree of speculation in real estate when you come down to it, but it should be backed up with solid research,” he says.
He believes many investors fail because they do not fully understand the area they are buying into.
AllianceCorp director Jason Paetow says many people feel comfortable with real estate, so they believe they already know how to invest.
“They want to buy something locally because that’s what they’re comfortable with and they jump on the internet and they start buying something. But they didn’t actually do any proper research,” he says.
These investors end up worse off than those who took the time to identify areas with strong growth potential, he says.
Director of wHeregroup Todd Hunter believes extensive research can help people make better buying and selling decisions.
“For example, you need to know population stats and things like that,” he says.
“If there are a lot of people moving to an area and they have good population growth, then you’re looking at a good area because that’s where people want to live.”
He also believes in researching growth patterns to find a suburb at the bottom of its cycle.
When properties have had several years of consistent negative growth, the area may be set to pick up speed. Identifying this trend and getting in early can be a highly rewarding tactic, he suggests.
Similarly, investors need to understand what tenants in the area will want.
Investors who buy an apartment in a family-orientated suburb may experience long vacancies, while neighbouring houses get snapped up.
“I buy what the tenants want, whether it’s a three-bedroom or a four-bedroom property, whether it’s on a bigger block or a smaller block of land, whether tenants like carports or garages or garden sheds,” Mr Hunter says.
In addition, market trends can have a big impact on an investor’s portfolio.
“Market conditions can make people lose money,” Mr Hunter says.
People buying in today’s low interest rate market may scramble to sell when rates climb. Yet fewer buyers will be around at that point, leading to a drop in the property’s value, he says.
Understanding the impact of these market changes can help investors buy and sell at the ideal time.
Without a clear investment strategy, research is just a collection of facts
2. No clear strategy
Without a clear investment strategy, research is just a collection of facts. A strategy allows you to interpret these facts and apply them to your situation.
“When researching, investors need to be really clear about what they are looking for,” Crawford Property Group director Ryan Crawford says.
AllianceCorp’s Mr Paetow agrees, believing many people lose money by jumping into the property market without a plan of attack.
“Unfortunately, most people just don’t invest to their full potential,” Mr Paetow says.
“Let’s say you’ve got two couples in exactly the same financial position, except one had a properly structured property wealth plan put together by a group of advisers, whereas the other couple went out and did what most people do, which is buy something locally,” he says.
The first couple’s strategy will allow them to purchase six or seven properties over 10 years, while the other couple is unlikely to hold more than two or three, he says.
That’s an opportunity cost of over $1 million, he explains.
“You need to understand exactly what your financial goals are and how you can structure your portfolio in a way that you’re able to achieve those financial goals,” he says.
Mr Paetow advises investors to first consider what they are trying to achieve and what their timeline is. Next, they should assess their financial capabilities before choosing an investment strategy to fit their needs.
After the first property purchase, keeping strategy in mind will help investors build their portfolio as quickly as possible.
Mr Paetow does a portfolio review with clients every 12 to 18 months.
“So straight away we assess how they got on with the previous purchase, then we make sure that they’re obviously ready to purchase the next one,” he says.
“Then over the years, we keep going back to assess their properties, looking at the values, looking at the rent, pulling equity out whenever we can and turning that equity over to buy more properties in the future.”
Mr Kumar encourages investors to make sure they are “investment ready” before beginning to shop around. In his experience, investors can become overwhelmed by information and have no clear way forward.
This “analysis paralysis”, as Mr Kumar calls it, can cause investors to miss out on prime opportunities.
“Especially in today’s market, you have to make quick decisions or you lose the opportunity,” he says.
“Generally, someone else with a lot more experience who is more capable of making a quick decision is able to jump in and take the opportunity out from under them.”
Investors can avoid this pitfall by ensuring they are fully prepared, with a firm plan and all finance preapprovals in place.
3. Following the crowd
Real estate is a beloved conversation topic at barbeques and get-togethers around Australia – but taking advice from your friend or neighbours may not result in the best returns.
“Lots of investors will always go to where they hear things are performing well,” wHeregroup’s Mr Hunter says.
People are drawn in by the high growth figures and a desire to share in a piece of the action. Yet at the point where an area gains a reputation for growth, the largest growth spurt has usually already passed, Mr Hunter says.
“By doing this, a lot of people actually jump in and buy at the top end of the property cycle, and quite often sell at the bottom. It’s unbelievable how often it happens,” he says.
Similarly, many people are tempted to buy within five to 10 kilometres of where they live, even though other areas may have better underlying fundamentals, Right Property Group’s Mr Kumar says.
He also sees people swayed by media endorsements.
“When the media says it’s an area to buy well, or property spruikers are getting up on stage saying it’s good, everyone jumps on that rather than relying on their own research,” he says.
This can also be an issue with rental yields, Mr Hunter believes.
“A lot of people obviously also don’t do their homework on the rental returns an area can offer. They have just listened to some hype. Then in reality, they don’t get the yields they expected to get,” he says.
Investors need to question the information they are given to ensure their decisions are based on facts, he says.
4. Taking poor advice
Bad advice delivers a ‘one-two punch’ to an investor’s wealth – it’s money wasted paying the so-called ‘expert’, and as the time ticks away investors are also missing out on opportunities to make better investment choices.
wHeregroup’s Mr Hunter warns that many property companies call themselves buyer’s agents, when their real agenda is selling their own stock.
“There’s a very big difference between a property company and a buyer’s agent,” he says.
He suggests investors thoroughly investigate anyone offering advice.
“Research the company, talk to past clients, go through Google to see if they’re a reputable firm, do bankruptcy checks on directors,” he says.
If the agents offer statistics, check this data against freely available sources like Google and realestate.com, he recommends.
Crawford Property Group’s Mr Crawford thinks investors benefit most from starting off with their own research, then aligning themselves with a mentor.
“We recommend investors deal with someone who has history, even someone who has personally invested in the particular area or investment style they want to follow,” he says.
Once the investor has purchased, a good quality property manager can help maximise their rental income.
“A good property manager will always keep you up to date about where the market is,” Mr Crawford says.
The property manager can boost a property’s cash flow by ensuring the rent is kept at the highest level achievable in the marketplace, he says.
Right Property Group’s Mr Kumar had a property manager who kept the weekly rent at $300 for over a year, despite the market rent sitting at $380.
“The other area where a lot of people lose money is going with a property manager who’s not proactive,” he says.
With property investment, bad decisions could be the difference between owning a single property and holding a multimillion-dollar portfolio. People armed with research, advice and a firm plan are well placed to seize opportunities for investment success.