There are three common mistakes made by property investors. Here’s how to conquer them.
According to Lloyd Edge, buyer’s agent and author of Positively Geared, the “overwhelming and sometimes confusing” journey of property investing can result in some investors falling victim to common traps.
“Strategic property investment has the ability to transform your life, as you can achieve financial freedom and have more time to enjoy the things you love to do most. But this isn’t the case for every Australian,” Mr Edge said.
“You already know that investing and making your savings work for you is the key to achieving your financial goals. However, you may have made a few mistakes along the way due to poor advice or lack of experience, so you may be left feeling disheartened.
“With a comprehensive property investment strategy under your belt, you can turn this around, even if it feels impossible right now.”
The top three mistakes property investors make (and how to combat them), according to Mr Edge, are:
1. Having the wrong financial structure
“Investors might find themselves in a situation where their loans are cross-collateralised (collateral for one loan is used as collateral for another loan) which gives the bank too much control. It’s imperative that all loans should be standalone – via using equity from the property or securing an equity loan,” Mr Edge said.
“If the loans are crossed-collateralised and one property falls in value, the bank may make you take equity from another property, which might be your highest performer, to pay back another loan.
“The best way to avoid this is using different banks. I recommend a maximum of two properties with the same bank. Many people don’t follow this golden rule, and banks can be sneaky and may offer you a lower interest rate if they take all your properties and group them together. Don’t fall for this trap! There is much more to getting finance than just interest rates. Investors needs to look at the whole package that the lender is offering.”
2. Buying in the wrong locations
“Fewer than 5 per cent of properties available for sale are investment grade. So, how do you find an investment-grade property in a region that is ripe for growth? My recommendation is to shortlist suitable property locations based on some of the following factors: good regional growth drivers, the presence of several different industries in the area, approved development plans, low vacancy rates, population increase, approved increased government spending in the area and increasing job prospects,” Mr Edge advised.
“I recently helped a client who had two negatively geared properties in Melbourne. He needed to achieve a large amount of equity in order to advance his portfolio and pay off debt. He didn’t have time for the traditional ‘buy and hold’ strategy, so the right location was pivotal. After extensive research, we knew Newcastle would enable him to hit the trifecta in property – growth, cash flow and instant equity.
“He was able to purchase land and build two separate units, with the total project costing $720,000. Upon completion, he sold them with a total sales price of $1,029,900. If the client did not create a new strategy that involved a new location, this would not have been achievable, so it’s important that you remain open to opportunities outside of your current location.”
3. Buying overpriced house and land packages
“Firstly, buying in the wrong location could mean your house is worth less in years to come, once your house is finally completed,” Mr Edge said.
“House and land packages are also typically available on the ‘outskirts’, meaning there will be less employment opportunities and access to public transport, compared with metropolitan areas. However, this is not always the case. Secondly, investors also underestimate the costs involved – the package might not include things like driveways, fences, etc.
“My recommendation is to secure a list of comprehensive inclusions from your builder so you can factor all costs into your budget, ahead of the build.”